Q1 2010 CRE OREO and Non-Performing Loans

Commercial real estate problems at US banks soared by 10.6% in the first quarter of 2010 over Q4 2009.

Commercial real estate loans being reported as 30-89 days late increased 16.3% indicating that the trouble in the commercial real estate sector is increasing rather than abating. Reports for 90 Day Late Loans but still accruing increased by 8.5%. Non-accrual commercial real estate loans, a loans last stop on the way to foreclosure, increased 8.9% Commercial OREO balances, commercial real estate acquired by a bank through the foreclosure process increased 14.1%.

The pace at which banks took back commercial real estate through foreclosure kept pace with the prior quarter with REO accounting for about 12.7% of the total pot in Q4 2009 and about 13.1% in the most recent report.

Overall (late, non performing loans, and REO) commercial real estate problems at US banks marched up 11% from $62.2B to $69.1B from Q4 2009 to Q1 2010.The pace of trouble was up with a total increase of 11.03% over the previous quarterly change which was 10.88% which was a slower pace than the 14.6% from the prior quarter.

The 50 Banks with the Top Commercial Real Estate REO Balances made up 40% of all commercial REO held at US banks while the top 50 banks with commercial non-accrual own 45% of those problems.

While the pace of problem loans and REO remains more or less the same the balances continue to grow. This growth in troubled balances shows a failure to act on the part of lenders struggling to workout their CRE loans and avoid write-downs.

With pressure continuing to build it seems highly likely that the commercial real estate market will have to see more distressed deals hitting the market.

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Top 50 US Banks CRE REO Report

What do Boca Raton, FL, Normal, IL, Germantown, MD, and Ogden, UT have in common? They are home to the latest four banks to shutter their doors in 2010, bringing the total failed bank count this year to 26. With over 700 banks on the FDIC’s watch list, 2010 could prove to be the year of extreme bank failure across the US.

Sun American Bank, Boca Raton, Florida

The FDIC, in conjunction with the Florida Office of Financial Regulation, closed Sun American Bank on March 5, 2010. At the same time, First-Citizens Bank & Trust Company and the FDIC entered into a loss-share transaction on $433.0 million of Sun American Bank’s assets assuming all of the deposits of the failed bank.

Sun American Bank had approximately $535.7 million in total assets and $443.5 million in total deposits by December 31, 2009, and the 12 branches of Sun American Bank will be reopened as branches of First-Citizens Bank & Trust Company.

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) for this individual closure will be $103.8 million. Sun American Bank is the 23rd FDIC-insured institution to fail in the nation this year, and the fourth in Florida.

Distressed Pro’s BankProspector shows weak capital adequacy ratios at Sun American, $63 million in non-accrual distressed asset totals and over $10 million in OREO. The bulk of the institution’s distress was centered in commercial and construction loan asset types.

Bank of Illinois, Normal, Illinois

Recently, the Bank of Illinois was closed by the FDIC and the Illinois Department of Financial Professional Regulation – Division of Banking. This failure represents the third FDIC-insured banking institution to close in Illinois and the 24th to fail in the nation this year. Heartland Bank and Trust Company of Bloomington, Illinois has assumed all of the deposits of Bank of Illinois, approximately $211.7 million in total assets and $198.5 million in total deposits. The 2 branches of Bank of Illinois have reopened as branches of Heartland Bank and Trust Company.

Bank of Illinois was burdened by distress in their construction and residential loan portfolios, and was carrying OREO balances over $1 million in both multifamily and commercial asset types.

Waterfield Bank, Germantown, Maryland

Waterfield Bank of Germantown, MD is the first bank to fail in Maryland this year. Unique to Waterfield Bank is the fact that the failed institution had a solo branch location and namely took deposits from customers via the Internet and 38 affinity groups.

Waterfield Bank had $155.6 million in assets and $156.4 million in deposits by December 31, 2009. At the time of closing, the amount of deposits exceeding FDIC insurance limits totaled approximately $407,000. Depositors with more than $250,000 at Waterfield Bank should call the FDIC at (800) 830-4735 to make an appointment to discuss the status of their funds.

Waterfield Bank was troubled with negative capital adequacy ratios, and distress mainly in their construction and residential loan portfolios, where 23% and 16% was non-current respectively.

Centennial Bank, Ogden, Utah

Centennial Bank of Ogden, UT was closed on March 5, 2010 by the FDIC in conjunction with the Utah Department of Financial Institutions. Zions First National Bank of Salt Lake City accepted the failed bank’s direct deposits from the federal government

The FDIC was unable to find another financial institution to take over the banking operations of Centennial Bank and brokered deposits will be wired once brokers provide the FDIC with the necessary documents to determine if any of their clients exceed the insurance limits. Customers who placed money with brokers should contact them directly for more information about the status of their funds.

The failed bank is the 26th FDIC-insured institution to fail this year and the second in Utah. It had approximately $215.2 million in total assets and $205.1 million in total deposits by December 31, 2009 and approximately $1.8 million in uninsured funds by the time of closing.

The cost of the failure to its DIF is estimated to be $96.3 million. BankProspector shows that Centennial Bank was burdened with significant construction loan portfolio distress, capital adequacy ratios between 1% and 3%, and OREO balances over $35 million.

US banks reported an increase in distressed mortgage and REO volume of nearly 10% over the previous quarter. Troubled real estate and distressed whole loans with banks now top $352 Billion, up from a little more than $320 Billion in the previous quarter.

Residential Real Estate Problems

As expected, residential real estate continued to be the dominant problem facing the nation’s banks in terms of dollar volume of distressed assets. For the first time, distressed loans and residential REO topped $200 Billion, up from $179.6 Billion in the previous quarter. Probably the most disturbing part of this trend is that the biggest increase came in the 90+ Day Late category, which jumped 22% in a single quarter. This suggests that problems are accelerating rather than abating.

Lenders only increased their residential REO balances by 1.6%, while non-accrual jumped 7.7%. Clearly there is a significant backup in processing foreclosures. It’s hard to see a way that this continued surge won’t result in a significant increase in available residential REO, and ultimately, lower home prices. It is important to point out that these figures are based on whole loan totals and not MBS, which encompasses the majority of residential mortgages. It would be reasonable, however, to assume that portfolio and securitized mortgages are experiencing similar trends.

Troubled Multifamily Property

Distressed multifamily balances continue to make up only a small fraction of the sea of bad loans and REO, but this past quarter the asset type saw the biggest increase in problems out of the four asset types that we track. Non-performing multifamily loan balances surged 23.3% last quarter while multifamily REO balances ballooned by 21.2%. So while distressed multifamily opportunities are rapidly increasing, the asset type still only comprises 3% of all real estate portfolio problems for America’s banks, 1,158 banks are reporting non-performing multifamily loans while 655 report multifamily REO. As of Q4 2009 banks are showing only $11.13 Billion in troubled multifamily loans, up from $9.19 Billion in the previous quarter.

Commercial Real Estate Distress

Banks started to book commercial real estate into REO at an increased pace at the end of 2009. Commercial REO balances jumped nearly 21% from the previous quarter. Non-performing (non-accrual) commercial real estate loans bumped up 15.4% while 90 Day Late loans dipped 7%, indicating that some lenders may be moving to take their CRE knocks sooner rather than later. A counter point to this is the fact that while banks are holding a little more than $7 Billion in commercial REO, their non-accrual CRE loans stand at $37.7 Billion, representing more than a 5-fold increase. Expect to see some of this move through the pipeline over the course of the year.

Construction Loans and Failed Projects

Construction loans make up 25% of our bank’s problems with a total bill of $89 Billion. This number only increased .4%. Construction REO jumped 14.4%, but late and non-accrual construction loans dropped .3% and 17.8% respectively. You could say, it would seem, that the one bright spot is that construction loan problems are abating. I’m hesitant to declare that, however, due to the fact that banks continue to whistle past the graveyard with non-performing construction loans.

Banks have made almost no progress in 3 quarters in reducing the level of construction loan non-accrual. Construction loans are usually fairly short term loans and banks haven’t been making them for a while, this accounts for the dwindling numbers. Not making construction loans is a double-edged sword, however, because while banks aren’t lending they have huge volumes of failed construction projects for sale. If developers can’t borrow, how can they buy?

Construction has been the leading cause of bank failures over the last 6 months. Expect to see many more who are failing to take meaningful action towards recovery on these projects. A lot of the bad construction loans are broken or failed condo projects, busted sub-divisions and the like. Well positioned developers could see a flood of opportunity this year.

Look for individual state and asset type reports over the next two weeks as we dive into BankProspector and pull out the data. Join our email newsletter, sign up for a Free State and US Bank Data account, or, start working on your own and sign up for BankProspector to access the distressed real estate data for each US bank directly.

You’ve probably heard of Mastermind Groups by now, and maybe you’re even involved in one, but are you using them to drive your distressed real estate transactions? Ken Hecht is doing just that.

Ken was a key player in the Wang Towers deal, probably the most famous distressed commercial property transaction in New England during the late 80’s early 90’s real estate bust. The four principals in that deal went on to net approximately $15 million each from a $25,000 initial investment – yes, you read that right.

Ken later became an SVP at CBRE Whitier Partners where he founded their Retail Advisory Group. He has sold or leased nearly $500 Million in commercial real estate. Ken has developed and owned a number of retail sites with partners and JVs and he has developed more than 4 million square feet for a major national retail tenant.

In this episode of the Distressed Property Professional’s Podcast series, Ken and I talk about:

• How the Wang Towers deal went together
• Differences and similarities between opportunities in the 90s and now
• How to put together effective distressed assets networking groups
• What banks should do to minimize their commercial real estate losses
• A forecast for the future of distressed CRE opportunities

The following content is available to non-members until January 27, 2010

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I got this question from a visitor this morning so I thought I’d put it out to our members and the web.

I represent the owner of a large, foreclosed upon hotel. We’re exploring HUD 232 LEAN financing for an assisted living facility. Of late, there seems to be an increase in inquiries related to retail or light industrial uses, which I take as a small, but encouraging sign of hope. I’m curious if any others are sensing any slight “uptick” in distressed commercial inventory. Thanks. –Attorney Boston, MA

As far as the availability of distressed commercial inventory, we can definitely quantify that. Banks are holding about double what they were a year ago in commercial OREO. BankProspector is showing the Q3 call report with 3,121 banks with $5,837,549,000 in commercial REO up about 74% from last December and we’re forecasting the December 09 report will show a doubling from the same quarter last year.

Its been widely reported that banks have not been willing to sell at market prices. In fact to do so may threaten the very existence of many of them. That’s why nonaccrual commercial loans loom at about 630% the volume of commercial REO.

WSJ During most of 2009, opportunistic investors accumulated cash to go after distressed assets but there was very little deal activity primarily because lenders were unwilling to unload debt at distressed prices. But this year, more lenders are expected to take hits as the financing drought continues and rents and occupancy rates keep falling.

As far as appetite for these deals is concerned I’d be interested to hear from the readership of this blog and our members.

From my position as a real estate auctioneer I don’t see a problem with appetite in the market. I am dealing with fewer dreamers and more seasoned, better equipped (albeit somewhat fewer) investors at my auctions, but enough of them to make market prices.

The problem I see is with sellers who won’t take the hit. Largely they are prolonging the pain and losing value. For some it’s a simple balance sheet equation, for others a clouded perspective and a hangover from single digit caps.

What’s your take on the appetite for distressed commercial inventory? Scroll down and leave a comment below.

What is HUD 232 Financing?
Summary: Section 232 insures mortgage loans to facilitate the construction and substantial rehabilitation of nursing homes, intermediate care facilities, board and care homes, and assisted-living facilities. Section 232/223(f) allows for the purchase or refinancing with or without repairs of existing projects not requiring substantial rehabilitation.
Purpose: Section 232 insures lenders against the loss on mortgage defaults. Section 232 insures mortgages that cover the construction and rehabilitation of nursing homes and assisted living facilities for people who need long-term care or medical attention. The program allows for long-term, fixed rate financing (up to 40 years) for new and rehabilitated properties and (up to 35 years) for existing properties without rehabilitation that can be financed with Government National Mortgage Association (GNMA) Mortgage Backed Securities.

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At the close of 2008 the nation’s lenders reported $28,759,725,000 in distressed commercial real estate loans. At distressedpro.com we’re projecting double that figure at the close of 2009.

We won’t have final figures until mid-late February for the close of 2009 but we’re projecting the final reporting for distressed commercial real estate loans for US banks to reach $56 Billion. Late and non-accrual CRE loan totals have been steadily increasing throughout 2009. The most recent reporting showed a 13.98% increase in a single quarter keeping pace with the same jump in the previous quarter. These figures account for 30 and 90 day late loans as well as non-accrual loans.

CRE loans reported as 90 days late grew at the fastest pace with a quarterly increase of 24.35%. Non-accrual loans which make up the lions share of the distressed note reporting jumped by 17.42% from the previous quarter. Non-accrual loans are a distressed notes’ last stop on the way to foreclosure. Only a very small percentage of non-accrual is ever recovered.

Year to date commercial real estate charge-offs increased nearly four-fold from the same period last year (.17%) but are still at less than 1% (.62%). It seems inevitable with the increasing problems that this number will jump significantly. By contrast 4.79% of construction loans were charged-off by the end of Q3 2009. Both of these figures have a long way to go, the question is when will lenders start taking the hit on their balance sheet. Experts are saying 2010 is the year.

An increasing number of institutions are dealing with commercial real estate problems.

• 1469 Banks Reporting 90-Day late CRE Loans
• 4518 Banks Reporting Nonaccrual CRE Loans
• 3121 Banks Reporting Commercial REO

Take a FREE Trial of BankProspector where you can find distressed loan and REO opportunities with lenders nationwide. Subscribe via RSS, or get FREE access to State and Regional bank data with a 5 Second Sign Up.

American Banker, an on and off-line trade magazine for the banking industry ran an article today reporting much of the same thing that I have been saying here on this blog That Sinking Feeling: CRE Flood Set to Start in ‘10. Banks will face significant problems with commercial real estate starting in 2010. This is the beginning of what many believe will be the best buying opportunity in decades. Many of the professionals I work with who service lender’s real estate problems have been echoing this same thing for the last 2 years – now the time has come. It isn’t going to be brief either, this window is likely to be open through 2014.

“For a lot of community and regional banks that have a concentration in real estate, it’s gotta be problem No. 1,”
Mathew Anderson, Foresight Analytics

When commercial real estate distress comes up, for the most part, people in the industry are talking about institutional level investments, CMBS deals and the like, but there are huge opportunities in whole loans written and held by community and regional lenders. With each passing quarter the non-performing loan and commercial REO balances are rising along with the number of banks struggling with them. Many banks haven’t had a commercial real estate problem in years, and all this comes together to spell big opportunity for investors, brokers, consultants etc., armed with the right information.

Distressed Commercial Real Estate Statistics

At the close of the last quarter 4,518 banks reported non-performing commercial real estate loans. Meanwhile 3,126 banks reported commercial REO. With nearly $40Billion in troubled CRE loans there’s a mere $5.8Billion in commercial REO (REO is “Real Estate Owned” which comes from the line item on a call report “Other Real Estate Owned” or “property acquired through foreclosure”). These problems are accelerating not waning. The graph above shows how distressed commercial balances have more than doubled over the last four quarters.

The time has never been better to get positioned to take advantage of the coming avalanche of opportunity. In future posts, through the beginning of 2010 I will write about how to identify opportunities with community and regional banks.

Take a FREE Trial of BankProspector where you can find distressed loan and REO opportunities with lenders nationwide. Subscribe via RSS, or get FREE access to State and Regional bank data with a 5 Second Sign Up.

The Q3 aggregated FDIC data will be available any day.

In Q2 this year we saw an increase in non-accrual commercial real estate loans (non-performing loans) of 31% nationally.

How much are we going to see this time?

Poll: http://polls.linkedin.com/p/66214/isxif

Subscribe to the feed or enter your email in the box to the right for an update when the numbers come out.

In the first one of these Commercial Real Estate Loan Workout posts I introduced you to the recent FDIC Policy Statement on Prudent Commercial Real Estate Loan Workouts. In this post I’m going to follow up on that and work through summarizing more of that document.

B.  Classification of Renewals or Restructurings of Maturing Loans

Many borrowers whose loans mature in the midst of an economic crisis have difficulty obtaining short-term financing or adequate sources of long-term credit due to deterioration in collateral values despite their current ability to service the debt. In such cases, institutions may determine that the most appropriate and prudent course is to restructure or renew loans to existing borrowers who have demonstrated an ability to pay their debts, but who may not be in a position, at the time of the loan’s maturity, to obtain long-term financing. The regulators recognize that prudent loan workout agreements or restructurings are generally in the best interest of both the institution and the borrower.

READ: as long as we’re in this credit crunch if your CRE loans are due and a refi is not possible for whatever reason, as long as the borrower can pay, you work out how you see fit, we understand and we’ll be patient.

The next few sections don’t provide us much insight as distressed asset deal makers but I think it is informative to see how the FDIC would like the banks to be thinking.

C.  Classification of Troubled CRE Loans Dependent on the Sale of Collateral for Repayment
This section speak specifically to how to classify the loss or potential for loss with a CRE loan. Specifically it indicates that when the sale of CRE is necessary to repay a loan the amount that that property is under water should be classified as “doubtful” but use that term sparingly.

D. Classification and Accrual Treatment of Restructured Loans with a Partial Charge-off
When you restructure a loan and charge off a piece the remainder of the loan is at worst substandard (rather than ‘doubtful’). It goes on to say that one workout strategy might be to separate the loan into two enforceable loans, and then you put the senior piece on your books as ‘accrual’ in many cases (meaning ‘its all good’).

A. Implications for Interest Accrual
If you restructure a loan that is not already in nonaccrual keep it out of there but document everything. If the restructuring happens after it hits nonaccrual then you’re going to need 6 months more of good history before you move it back to accrual.

I think the lesson here if you’re a CRE borrower is that you should be working hard to modify or restructure your loan BEFORE you get into trouble. Why? Because its much easier for the bank to deal with. They can keep your note in a nice safe warm accrual place and they don’t have to be all over you for months. One interesting side note in this section is that it says:

A sustained period of repayment performance generally would be a minimum of six months and would involve payments of cash or cash equivalents.

If anyone can tell me what the cash equivalent is I’d love to hear about it in the comments. Do interest reserves count?

The paper goes on with about 14 pages of commercial loan workout examples and several pages of attachments. Anyone working to restructure CRE loans for borrowers or those working with banks should read these.

Are you working our commercial loans either for borrower or on the lender side? We want to hear from you. Contact us to schedule a podcast or webinar and be featured on this site and certainly leave a comment below.

Its no secret that Florida is one of four states that has borne the brunt of the residential real estate bust. Now as we teeter on the edge of a major commercial slide what role will Florida fill?

While we don’t have the data on the entire Floridian commercial real estate universe we do know what trouble lies with Florida based banks and since local and regional banks tend to do the bulk of the commercial lending our data provides a good barometer of what’s to come. These numbers are accurate as of the end of Q2 reporting Q3 data should be available any day.

Florida Banks Commercial REO

Florida based banks reported commercial REO balances at only $216,821,000. This number is spread over 120 banks. Do keep in mind though that this does not include bank owned construction projects or multifamily REO. Also the trend has been an increase in every one of the last four quarters.These numbers are only for banks headquartered in Florida. this number has grown from only $81,996,000 just four quarters ago. That’s a 164% increase.

Florida Banks Non Performing Commercial Loans

FL banks saw a 112% increase in non-performing commercial real estate loans over 4 quarters

Non performing loans are the pre-cursor to REO. If our bank data is any indication of what’s to come (and it is) then commercial real estate investors are about to see an avalanche over the coming quarters. At last reporting Florida based banks had $1,235,618,000 in distressed commercial loans (non performing) at 217 banks. It is quite clear that the trouble is growing and it is not being dealt with very quickly.

Are you an investor, broker, banker, or attorney dealing in distressed property or working with banks? We want to hear from you. Weigh in on the opportunities you’re seeing now and what you see in the future in the comments below.