In 2008 and 2009, I was besieged by "dent-and-scratch" real estate (and real estate loan) buyers who were looking to reap the kind of profits many of them had made in the 1990s, when they bought real estate from the RTC at low prices. They were sure that banks would be pressured by their regulators to write down the carrying value of distressed real estate collateral and that banks would be dumping real estate assets at attractively low prices. They were wrong then and according to a recent story in National Mortgage News, those bulk buyers who are still in the game continue to wail and gnash their teeth at the idiotic behavior of banks that fail to understand their right to profit at the banks' expense.
There is little sign that OREO levels will decline anytime soon, says Steven Sandler, chief executive of Crosswind Capital LLC, a private-equity firm that buys distressed assets. "2012 will be just as heavy a year as 2011," he says.
As Mckenna, Long;s Brian Olasov astutely observes, the problem is that regulators devoutly worship at the temple of the appraiser, which means that as long as the bank can obtain an appraisal that values the property at a level higher than the price it is likely to receive if it actually tried to sell the property to a "willing buyer," the bank has no incentive to sell it and take the additional earnings and capital hit.
"As long as some bank examiners deem an appraised value as the be-all and end-all of property loan values, banks will manage property loan books and OREO portfolios to minimize current capital writedowns," says Olasov, who advises banks on real estate holdings. "I don't see that changing, absent legislative fixes."
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Appraisers will likely continue to overlook the sales of distressed properties in surrounding areas when valuing properties, Sandler says. That practice will continue to skew values upward, which "may make the boards of the community banks happy because it justifies their continued reliance on extend and pretend, but it doesn't clear the OREO inventory," he says.
Of course, relying on appraisals is wielding a two-edged sword, especially for community banks that are too-small-to-save. As capital levels decrease, so does the impact of writedowns required by a new appraisal.
Some banks can't dump OREO, because of capital issues. That situation is unlikely to improve much in the near term, says Chris Marinac, an analyst at FIG Partners LLC. "A bank approaching a 4% Tier 1 leverage ratio is going to have to think long and hard on how aggressive it writes down OREO," Marinac says. Falling below such a threshold is "unpalatable" for a bank because it often triggers the Federal Deposit Insurance Corp.'s process of preparing for a failure, he says.
"Some banks don't have the liquidity to write off $300,000," says Rob Whitmire, a partner at Bull Realty Inc., an Atlanta brokerage firm that represents community banks in asset sales. "It's almost an impossible feat for them because, in some cases, it would shut them down."
In many cases, it HAS shut them down.
As if that situation wasn't enough to incentivize the sale of Jack Daniels Black by the box-carload, last week The Urban Institute released a report that the foreclosure backlog in this country is going to take so long to clear that those of us of a certain age may be long in our graves before it works it way through the promised land.
"The foreclosure inventory that is building up is going to take an incredibly long time for lenders to clear," said Leah Hendey, research associate at the Washington firm. "At the current pace of foreclosure sales, we are looking at a process that could take decades to complete. It is critical that the status of these properties be resolved quickly if we want to stabilize communities and housing markets."
Any pundits who tell us that they have seen anything like this since the 1930s, or that they have the magic bullet to blast our way to a "quick fix" deserves to be hooted out of the hall. The problem is massive and there's no simple solution in a country that, at the moment, is basically broke.
And here's one more thought to brighten your new year: Those of us who think the last four years have been tough on most Americans (with the notable exceptions of too-big-to-fail banks, Wall Street in general, and trial lawyers) had better buckle up, because the next decade or two may be an even bumpier ride.
