Formerbanker_IHB
New member
[quote author="USCTrojanCPA" date=1253420778][quote author="Formerbanker" date=1253402691]I'm a long time reader but have never posted a comment on a forum thread. I found Newport Skipper's posts and the ensuing back and forth as entertaining reading...for about a week. S/he was then a complete turnoff to the point it became irritating to try to read a thread in which s/he was involved. I appreciate the ban.
To address some comments as to why banks would want to hold REO...and I am only speaking only from my own experience (former bank regulator turned credit risk manager whose duties included overseeing problem assets and REO disposition from early 90's - 2007) but - usually, you want that REO off the books as quick as possible. It is a nonperforming asset. Even if it's leased out, the return is terrible. Let's use a generous example of say, a property on the books for $500M rented for $2M/mo. That $24M a year in rent (assuming you actually collect it), after property tax, prop mgmt expense, maintenance reserve, etc., might be $12M - $15M at best, or maybe 2% return. That's generous. And there is a direct expense to the bank to write down the asset's value if it declines while on the bank's books (plus you need a new valuation on the thing probably every year). If that $500M asset declines to $480M, bam, an addiitional $20M loss.
However, the volume of REO's being handled now is just astronomical and most banks are still just trying to get their REO management systems working well enought to handle the volumes, identify assets that are due for writedowns, and all while using employees who are learning on the job (the REO handlers of the early 90's are largely gone, from what I've heard through many grapevines, not that there were near enough to go around for today's volumes). I have read similar comments from other posters in the past and based on all I hear from people working the front lines, it is still the case. And I believe there's not an accounting firm around that can keep up with whether or not bank clients have written down the asset values sufficiently based on the data available from their clients...sBottom line, the current environment is conducive to favoring the banks leasing these REO's while they buy time to figure out which end is up...and by the time they figure out how much they should write down, the banks are hoping values will stabilize and they won't have to write down as much after all, in my opinion.</blockquote>
Great post, thanks for sharing your thoughts and experience. I just wrapped up working on a 7+ month consulting project at a large regional bank where I would risk rate/downgrade commercial real estate loans. The bank had thousands of smaller commercial RE loans and did not have the staff to handle doing the loan reviews (when times were good there was no need to do reviews because everything was kicking ass). The bank is still staffing up their special assets department at the moment but they've gotten a better handle of what the issues are. They are also implementing Basel II to come up with an aggregate reserve of the tiny loans that will not get reviewed. I'm guesses there aren't many REO/special assets folks left from the 90s because it wasn't the most fun job around. I made calls to certain borrowers to try to get an idea of what was going on and see if maybe they might benefit from a loan mod but the tone from them was basically F-YOU. I've heard that many banks are considering of using consultants to assist them nowadays and with so many bankers on the street it seems to be working out for now.</blockquote>
Hmm, I wonder which bank
But I agree with you...consultants with asset management and/or loan review experience will find plenty of work, particularly at the community and regional banks right now. Heck, I 'retired' about two years ago for personal reasons and still get calls regularly (it's a small world in SoCal banking at the small banks!).
In general, my experience is that borrowers (particularly on the CRE side) will cooperate if they've been trained to cooperate FROM THE START. But based on how CRE loans have been originated the last 10 years (loan origination often separated from loan management at inception), there was generally poor communication upfront by banks regarding the expectations - like, borrowers, we will want to inspect your properties annually, we expect updated operating statements, etc. even though most loan docs for CRE loans require borrowers to submit things like annual FS, rent rolls, etc. Their friendly loan officer forgot to focus on that.
For borrowers for whom expectations were not clearly communicated from the start, you get stuck waiting until they need something from the bank (a late charge waiver, a payment deferral, a lower interest rate, or something) as your chance to get what you want from them. Or flat out offer them an easy mod with a 1/8 interest rate reduction if they give you updated operating statements, with the rate reverting back after one year if they do not give you the next year's statements.
From a personal perspective, if you do consulting work again, driving by the properties to check occupancy and condition provides a wealth of information!
And no, it's not really a fun job..it can be pretty draining mentally. But for every poor borrower you feel bad for due to life's circumstances causing financial problems, there is a jerk who could just care less about financial obligation to the bank. So I didn't mind being harsh. I would often file an NOD when a RE loan was 45 days past due - why wait for 90 days ? Did I get the borrowers' attention doing this? Yes. After all these years, I firmly believe that your first loss is your best loss...bite the bullet, get it over with, don't drag it out. But the level of crud in many portfolios today is so high...there's just not enough capital in these banks. We'd see bank failures left and right with my mantra.
If I were still in SoCal (I'm back east now and will be for a few more years) I'd be all over pulling together the folks I used to work with to put together a consulting group...so good luck with your future bank consulting work, if you chose to do it...you could be busy a long, long time...
To address some comments as to why banks would want to hold REO...and I am only speaking only from my own experience (former bank regulator turned credit risk manager whose duties included overseeing problem assets and REO disposition from early 90's - 2007) but - usually, you want that REO off the books as quick as possible. It is a nonperforming asset. Even if it's leased out, the return is terrible. Let's use a generous example of say, a property on the books for $500M rented for $2M/mo. That $24M a year in rent (assuming you actually collect it), after property tax, prop mgmt expense, maintenance reserve, etc., might be $12M - $15M at best, or maybe 2% return. That's generous. And there is a direct expense to the bank to write down the asset's value if it declines while on the bank's books (plus you need a new valuation on the thing probably every year). If that $500M asset declines to $480M, bam, an addiitional $20M loss.
However, the volume of REO's being handled now is just astronomical and most banks are still just trying to get their REO management systems working well enought to handle the volumes, identify assets that are due for writedowns, and all while using employees who are learning on the job (the REO handlers of the early 90's are largely gone, from what I've heard through many grapevines, not that there were near enough to go around for today's volumes). I have read similar comments from other posters in the past and based on all I hear from people working the front lines, it is still the case. And I believe there's not an accounting firm around that can keep up with whether or not bank clients have written down the asset values sufficiently based on the data available from their clients...sBottom line, the current environment is conducive to favoring the banks leasing these REO's while they buy time to figure out which end is up...and by the time they figure out how much they should write down, the banks are hoping values will stabilize and they won't have to write down as much after all, in my opinion.</blockquote>
Great post, thanks for sharing your thoughts and experience. I just wrapped up working on a 7+ month consulting project at a large regional bank where I would risk rate/downgrade commercial real estate loans. The bank had thousands of smaller commercial RE loans and did not have the staff to handle doing the loan reviews (when times were good there was no need to do reviews because everything was kicking ass). The bank is still staffing up their special assets department at the moment but they've gotten a better handle of what the issues are. They are also implementing Basel II to come up with an aggregate reserve of the tiny loans that will not get reviewed. I'm guesses there aren't many REO/special assets folks left from the 90s because it wasn't the most fun job around. I made calls to certain borrowers to try to get an idea of what was going on and see if maybe they might benefit from a loan mod but the tone from them was basically F-YOU. I've heard that many banks are considering of using consultants to assist them nowadays and with so many bankers on the street it seems to be working out for now.</blockquote>
Hmm, I wonder which bank
But I agree with you...consultants with asset management and/or loan review experience will find plenty of work, particularly at the community and regional banks right now. Heck, I 'retired' about two years ago for personal reasons and still get calls regularly (it's a small world in SoCal banking at the small banks!). In general, my experience is that borrowers (particularly on the CRE side) will cooperate if they've been trained to cooperate FROM THE START. But based on how CRE loans have been originated the last 10 years (loan origination often separated from loan management at inception), there was generally poor communication upfront by banks regarding the expectations - like, borrowers, we will want to inspect your properties annually, we expect updated operating statements, etc. even though most loan docs for CRE loans require borrowers to submit things like annual FS, rent rolls, etc. Their friendly loan officer forgot to focus on that
. For borrowers for whom expectations were not clearly communicated from the start, you get stuck waiting until they need something from the bank (a late charge waiver, a payment deferral, a lower interest rate, or something) as your chance to get what you want from them. Or flat out offer them an easy mod with a 1/8 interest rate reduction if they give you updated operating statements, with the rate reverting back after one year if they do not give you the next year's statements.
From a personal perspective, if you do consulting work again, driving by the properties to check occupancy and condition provides a wealth of information!
And no, it's not really a fun job..it can be pretty draining mentally. But for every poor borrower you feel bad for due to life's circumstances causing financial problems, there is a jerk who could just care less about financial obligation to the bank. So I didn't mind being harsh. I would often file an NOD when a RE loan was 45 days past due - why wait for 90 days ? Did I get the borrowers' attention doing this? Yes. After all these years, I firmly believe that your first loss is your best loss...bite the bullet, get it over with, don't drag it out. But the level of crud in many portfolios today is so high...there's just not enough capital in these banks. We'd see bank failures left and right with my mantra.
If I were still in SoCal (I'm back east now and will be for a few more years) I'd be all over pulling together the folks I used to work with to put together a consulting group...so good luck with your future bank consulting work, if you chose to do it...you could be busy a long, long time...
