U.S. banking regulators have officially clamped down on real estate lending.
Could this be another example of mis-regulation, like the mistakes that helped fuel the crash of 1929?
IF ALLOWED TO STAND, THIS COULD CAUSE SEVERE DAMAGE TO BANKING, & REAL ESTATE PROJECTS THROUGHOUT THE U.S.A. AND COULD EVEN IMPACT GLOBAL REAL ESTATE MARKETS.
On Wednesday, December 6th, the Federal Reserve, the OCC and other regulators issued new guidelines for examiners that essentially put a gun to the heads of bankers who continue to lend money on commercial real estate projects.
USA today reported that Banks with high concentrations (of real estate loans) might have to make management changes and raise capital reserves.
Federal Reserve Governor, Susan Schmidt Blies said that it was to insure that banks were healthy and profitable. Bankers responded that they had been doing well enough on their own, without the "help" of the regulators. Bankers, who deal in economics and the reality of making and collecting loans, are furious, and in other cases scared. Over 4000 bankers issued letters and comments to the regulators, trying to make this ruling more logical and reasonable. It did little good.
The Independent Community Bankers of America issued a statement of concern: If (the rule) causes community banks to pull back unnecessarily from sound commercial real estate lending activities, it would harm the nation's economy Karen Thomas, ICBA EVP said. Under the marching orders for examiners are these parameters:
- Banks with construction and development loans totaling 100% or more of capital will be considered problems for further examination scrutiny and criticism.
- Banks with construction, multifamily housing, and commercial real estate loans of 300% or more of capital are also on the radar.
- Banks that have seen real estate portfolio growth of 300+ percent in the past 3 years are to be criticized.
- Loans that are dependent on the cash flow from the real estate held as collateral are to be considered problems.
In 1989, I published articles in several national papers, including banking, business journals and even the American Banker stating that "THE NATIONS FINANCIAL CRISIS BEGAN ON THE BANKS OF THE POTOMAC".
Later CBS, National Public Radio, and over 60 papers in the USA reported these comments. Speaker of the House, Jim Wright read my comments on the floor of the House of Representatives, and told me "Your incisive review of federal banking regulatory policy is exactly on target".
In that article dated 2/27/89, I said that: "The regulators are making exactly the wrong moves at exactly the wrong time, and this will cause deflation and failure". (We all know of the massive upheaval in banking and real estate that followed. Millions of Americans lost their savings, not because of bank lending, but because of regulatory pressure to call loans, charge loans off and punish bank borrowers who had real estate loans).
Regulators don't seem to understand that Bankers understand economics. They already are pulling back on real estate loans. They, if left alone, can work with problem projects and give them reasonable time to work through their projects. But, if pressed by regulators, to accelerate loans, call loans, or refuse credits, we can have another regulatory based recession and also massive failures.
This movement on the part of the OCC and the Fed proves again that the Bush Administration really doesn't believe in Free Markets. Federal Bank regulations have now given the direction for examiners that will allow them to classify thousands of loans and U.S. banks as troubled banks.
This will stifle real estate lending.
After the debacle of the Reagan/Bush banking debacle, regulators admitted that they were wrong. It was finally admitted that the economic goal was to reduce the number of banks, to facilitate concentrations of banking power within the giant banks, which were not subjected to the same level of examiner criticisms. The giant banks were allowed to let their internal audit departments do much of the work for examiners, (and still are) and thus miss much of the heat.
Bankers have already been feeling pressure from examiners; this latest move simply makes public the direction regulators were taking. Banks throughout America have reported that examiners are trying to limit their real estate lending.
One method is by requiring banks to have more and more documentation, more statistical studies, more models and more discounting, and to require clients to jump through so many hoops that they finally just give up trying to borrow money. A favorite tactic has been to require that customers get 2 appraisals or a detailed independent appraisal review, before the bank can make a loan. The appraisal review process often takes weeks. We have heard of some review processes, taking months. These types of tactics often kill a deal.
Examiners have with little subtlety, hinted that if bank managers don't curtail real estate loans that "We may recommend management changes". It is a form of putting a gun to the heads of bank executives, if they don't follow examiner advice.
The last cycle of bank failures was only ended when the Clinton Administration was elected and had a clear understanding with Allan Greenspan (then head of the Federal Reserve) and other regulatory agencies, that the role of government, should be not be to fail banks, but to allow banks to be profitable. At that time, the regulators were pulled off and the industry started a growth period with great profitability. We are amazed that this current Bush Administration is making the same mistakes that his dad made in the late 1980's. The net result of that fiasco was not to strengthen the system, Bush and Regan nearly destroyed it. But they did manage to make the Giant banks more dominant. Perhaps that was the goal then. Is it the hidden agenda now? Our advice is that you that are involved in banking should go to your representatives in Washington, DC and tell them what regulators are doing. And you that are involved in real estate should do the same. A new congress has been elected that will be responsive to you. Seek a political solution before disaster sets in!
THOUGHT FOR THE DAY: "HAVING THE REGULATORS TELL YOU THAT THEY WANT TO PROTECT THE BANKING INDUSTRY BY FAILING BANKS IS LIKE A FOREST RANGER SAYING HE WANTS TO SAVE THE FOREST BY CUTTING DOWN THE TREES."
Ben B. Boothe, Economic Consultant.
QUESTIONS AND ISSUES RELATING TO BANKING REGULATION AND REAL ESTATE
BASIC QUESTIONS FOR BANKERS, REAL ESTATE EXECUTIVES, AND REGULATORS
We suggest some basic questions:
Are interest rates still low and does this make real estate an attractive investment?
Are low interest rates a function of the Federal Reserve and U.S. Government policy?
If real estate is a good investment, and good for the economy, is it not within Community Reinvestment Act regulations, to make real estate loans?
If a bank has a problem loan, the bank will deal with it with financial tools, or by asking the client to put additional collateral or strengthen the credit with additional repayment or guarantee sources. How does putting additional regulatory pressure help in this process?
Is it possible that this ruling, will cause examiners to charge off more loans, and thus create a regulatory induced recession?
Is it possible that the regulators, by manipulation of the economy, and by administering examinations that tend to favor giant banks and punish independent community banks, illegal?
Do actions by the regulators that might cause recession and bank failures weaken the U.S. economy and our nation's ability to compete in the global economy?
LOCAL BANKS, KEY TO COMMUNITY SURVIVAL
Local banks are a key to the survival of local communities, local projects, growth, and the potential for financial success.
Local banks have thrived and prospered the past few years, when regulators allowed them too, by staying out of their business. Now it seems that the regulators are about to bushwhack the industry and hurt a lot of people in the process. Have you ever noticed what happens when a community loses it's local financial institution? The downtown sector begins to die. Business failures increase. Local individuals loose the ability to find financing for projects, so they go elsewhere.
Branches of giant out of state institutions generally are managed by individuals with huge "operation manuals" many policies, and little loan authority. So, the financial foundation of the community simply goes away.
It is important to the people, and to the nation, to have a strong system of community banks, to take care of the needs of the community and the people. If you have ever called your "Giant" bank, and been caught in a web of telephone answering systems, with little personal service, and no one who can "change the system" or make a decision, you understand.
The policy of the Federal regulators, to essentially take away the freedom of community banks to make real estate loans, is counter productive, both for banks, for real estate professionals, for communities, and for the economy of the United States and the world.
You need to find "real" bankers, those people who live and work in your town, and who put the profits of their banks, back into your local bank, and into your community. And you need to speak up for them now, in the face of federal efforts to curtail local banks lending policies. Talk to your banker. Ask him how that you can support him, in appreciation to his being there, for your community.
Or you can say goodbye, and deal with automated robots, or bank managers with the branches of giant banks who have no authority, but they DO have policy manuals.
The OCC appears to be falling back on old patterns of mis-regulation, and poor timing. The OCC and the Federal Reserve did the same thing during the Reagan and Bush Sr. regimes, causing massive bank failures and national recession.
Thousands of banks failed. This was under the guises of "Protecting the Banks". It is similar to a forest ranger telling us that the best way to protect the forest is to cut down the trees.
At that time, they also followed a pattern of over regulating small banks, and allowing the giant banks get away with massive abuses. The only ones to benefit from the last round were the giant banks which were able to seize smaller banks, at bargain prices (because the community banks were under pressure from the regulators to either merge, consolidate, or be failed).
I recall that as the President of a $40,000,000.00 bank, in 1989, a 25 year old girl in a dark pin striiped suit, came into my office and introduced herself as our bank examiner. In a matter of days she had charged off $4,000,000.00 in loans. Nearly every major real estate loan was "classified" as a problem loan, even those that were not past due. I was appalled. My bank, which had for years, consistently had high ratings, was overnight turned into a problem bank, by her pen.
2 years after the bank failed, a representative from the OCC came by my office and said: "I apologize for what we did. It was wrong. You had one of the best banks in the area. We failed a lot of banks like that, and it was simply wrong." I told him "Thanks, but that doesn't help my stockholders who lost their money because of you guys." He shook his head and said: "I know, I hope we never do that again."