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I work as a financial consultant for small business.  I had an interesting meeting today with one business's bankers.  The bank was going to start foreclosure on a real estate mortgage loan.  There was little sense in their doing so and we were appalled.  The business has not missed a payment, no payment has been late, they have over 50% equity (based on an appraisal less than 1 year old), and they have proven means of continuing to make the payments.  Yet the bank says they will initiate foreclosure proceedings in 90 days if we do not find another bank to do the mortgage loan.

Here was the shocker:  (below the fold)

The bank says they are being forced to do this by the OCC (Office of the Comptroller of Currency).  The OCC ( regulates our national banks.  They told this particular bank that their exposure in commercial real estate was too high and they must reduce it.  The bank said that no matter how credit worthy, if a customer has a commercial real estate loan coming due within the next 6 months then the customer must find financing with another bank.  It will not be renewed.  They said they have no choice and they are being forced to do so by the OCC.

What does this mean to the economy?  Well, in my area, it means that they are foreclosing a lot of properties and holding a sheriff's sale to liquidate the loan.  This is because other banks are reluctant to write new loans (especially the bigger banks).  The local banks are the only alternative and they have limited means and are trying to take care of their long term customers first.  So the commercial real estate market here is in jeopardy of tanking in a very short period of time.

So let's return to what the OCC is doing.  It seems that their approach is counter-productive to what the government says they are trying to do to rescue the economy.  We have poured billions into the banks to stimulate lending, while the OCC is telling banks to reduce their exposure.  Does the right hand even know what the left hand is doing?  And we are not talking about eliminating "toxic assets".  The bankers said they are refusing to loan to their best and most credit worthy customers.  They are refusing to renew loans to anyone.

Why doesn't the OCC take a less dramatic approach?  They could identify a problem area, such as over-exposure in commercial RE, and require that the percentage be reduced over-time by not writing new loans.  They don't have to force the bank to take drastic, anti-economic, measures to meet new criteria within an unrealistic time frame if it's going to have a far-reaching negative impact.

I'm contacting my senator and representative to ask them to review the OCC's current policies.  Your help would be appreciated.  Thanks.

Originally posted to RudeDog on Thu Mar 12, 2009 at 03:33 PM PDT.

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Comment Preferences

  •  ouch. my question is this... (18+ / 0-)

    are you sure they're telling you the truth? Maybe they're using this OCC thing as an excuse to get out of that line of business and scoop up some cash.

    (-8.00,-7.85) 'The idiot is not our greatest problem. It is the moron type that is our great problem." -- H. H. Goddard

    by bubbanomics on Thu Mar 12, 2009 at 03:36:13 PM PDT

  •  that sucks (0+ / 0-)

    Everybody's jittery, nobody knows where the bottom's going to be.  But maybe this will cheer you up, unless you think there are too many bailouts already, in which case it might piss you off.

    Law is a light which in different countries attracts to it different species of blind insects. Nietzsche

    by Marcion on Thu Mar 12, 2009 at 03:43:23 PM PDT

  •  Here's a speech the Comptroller made (4+ / 0-)

    on subject.

    It's obvious that this is a priority issue for them. It doesn't get into specific enforcement mechanisms.

  •  Reason: PCPBM (1+ / 0-)
    Recommended by:
    polar bear

    People Can't Pay Back the Money.

  •  Seems like a obvious breach of contract by the (3+ / 0-)

    bank, if these facts are true.  

    The states have agencies that could quickly hit them with sanctions, I would think....  

    The business has not missed a payment, no payment has been late, they have over 50% equity (based on an appraisal less than 1 year old), and they have proven means of continuing to make the payments.  Yet the bank says they will initiate foreclosure proceedings in 90 days if we do not find another bank to do the mortgage loan.

    "So oil companies and investors are stashing crude, waiting for demand to rise and the bear market to end so they can turn a profit later."

    by bamabikeguy on Thu Mar 12, 2009 at 03:49:21 PM PDT

  •  Commercial real estate/construction lending.... (3+ / 0-)

    ....are very risky loans.  I worked as a paralegal on construction lending a number of years ago.  The only thing that's changed is that there are virtually no controls anymore. 25 years ago when I did this work, the poorest risks were the commercial/construction lending real estate borrowers, and that was when there were a few rules.  

    Now -- someone who has made payments and has the means to continue making payments just cannot be penalized -- these are the engines of the economy.  So some common sense needs to apply here. So this needs to get sorted out.    

    •  common sense? (3+ / 0-)

      That was are argument.  The bank agreed that it didn't make sense.  They suggested we contact our representatives about the OCC.

      BTW, the RE loan is for a printing company.  It is for the building they operate out of - it is not a construction or development loan.  Commercial real estate includes all those small businesses that actually produce something too.

  •  Tinfoil hats ready? (6+ / 0-)

    OK, this may be a bit overly Machiavellian, but ..

    The bank has given out CRE loans ..
    Some of these loans will default ...
    If enough default they're in BIG trouble ...
    Government says to bank, You're overexposed ...
    Bank needs to reduce exposure ...
    Bank knows some large CRE loans are not current ..
    But revealing those losses means trouble ...
    SO .. bank goes after customers it thinks CAN pay
     first ...
    Reducing exposure without having to reveal losses on
     loans that are not current ...

    The bank cannot reduce exposure by unloading bad loans without taking a big loss ... so they just carry those loans while reducing exposure by getting  customers who are current to pay off early ...

    or something like that :)

  •  wage stagnation (2+ / 0-)
    Recommended by:
    yoduuuh do or do not, polar bear

    Banks shouldn't lend to people who can't pay back the loan.

    Now when we talk legal persons, the steps get a bit more complicated than when we're talking natural persons, but the concept is the same.

    This is an interesting story, to say the least. At one point, you refer to this process as foreclosure, then at another point, you reference loans coming due within six months. Which is it? Is the company defaulting on the mortgage, or is the bank not renewing a financing agreement set to expire soon? The former is caused by factors that ultimately lead back to wages. The latter, well, suggests that something else is in play in this particular case.

    So, I wouldn't extrapolate from this incident to national lending trends.

    The bankers said they are refusing to loan to their best and most credit worthy customers.  They are refusing to renew loans to anyone.

    If that's true, then they're making the state-chartered banks in your area absolutely giddy. The best customers, the ones that are credit worthy and profitable; other banks would love to get that business. Of course, more likely, that's just what a banker who's bringing bad news about not renewing a loan would say.

    Of course, there's another option, and that is that the bank is committing some sort of breach of contract. In which case, might be time for the financial consultant and the real estate attorney to have a little consultants' chat and report back to business owner.

    •  Which is it? (4+ / 0-)

      They are doing both.  They are not renewing laons coming due, and they are forcing the hand of those loan holders with longer term notes by threatening foreclosure.  And, as I explained in another response, they can declare almost any commercial loan in default for almost any reason.

      Unfortunately, the state banks are exhibiting an extreme amount of caution.  And who knows what their commercial RE exposure is?

      "other banks would love to get that business."

      Not in these economic times...

      •  caution is good (1+ / 0-)
        Recommended by:
        polar bear

        I don't think calling the loan is a breach of contract, but I was offering that possibility since we don't know the terms. If you have a contract that lists reasons why the bank can call a loan, then there's nothing fishy going on when the bank calls the loan. What I particularly don't like is suggesting that reflects some sort of national trend. From a public policy perspective, most people are worried about residential real estate, not commercial real estate. They're worried about their homes being foreclosed. There's vacant commercial real estate everywhere. What was the contingency plan for handling a called loan, particularly in an environment like this when there's widespread downward pressure on real estate prices?

        "other banks would love to get that business."

        Not in these economic times...

        That's my point. There's something going on here in the details of the story. In these economic times banks love profitable companies. Something changed either at the bank, or in the position of the organization. If it's a bank change, you can quite likely find financing for half of a property from another bank. If something else is different, though, then that change is what needs addressing.

        Here's my main issue. The title of this diary isn't 'Help me obtain CRE financing for a valuable small business'. Instead, it's 'Why banks aren't lending'. I don't see the national trend in this particular story. I just see a sucky situation where a small business clearly will be better off finding a new banking partner. And let me emphasize, I do empathize that this is a sucky situation. But this is why banks put recall provisions in contracts; so they can recall the loan at their pleasure. And perhaps the decision that makes the most financial sense is to work with the bank to sell the property and lease space, either from the new property owner or at another location, if refinancing within 90 days appears unrealistic.

        The OCC is being responsible when they encourage banks to carefully evaluate the risk management models they're employing. But if a banker told you explicitly, 'the OCC told us to call this loan', I'd be skeptical of that. In fact, that might even be a pressure point you have with at least getting the bank to give you more time to refinance. Have somebody from the OCC call the bank or tell the bank that you're discussing the matter with the OCC or something like that.

  •  Saw this in the early 90s. (2+ / 0-)
    Recommended by:
    Catte Nappe, polar bear

    When the economy shrinks commercial realestate tanks. Loans become liabilities and the banks start forclosing. More property gets dumped on the market and more loans are exposed. It turns into a real mess real fast.

    Would somebody please stimulate this economy so that it starts working again?

    We shall overcome, someday. Yes we can.

    by Sam Wise Gingy on Thu Mar 12, 2009 at 04:10:00 PM PDT

  •  Similar things seem to be going (2+ / 0-)
    Recommended by:
    yoduuuh do or do not, polar bear

    with banks looking for means to reduce their credit card portfolios. On one hand you have part of the government encouraging the to increase credit and on the other you have another part of the government trying to reduce their risks to keep them solvent. It's bureaucratic schizophrenia.

    •  schizophrenia (2+ / 0-)
      Recommended by:
      yoduuuh do or do not, polar bear

      That was my purpose in posting this.  To increase awareness that within the government right now, there are agencies that are not exactly working in a coordinated way to help us out of this economic mess.

      Until today I did not know about the OCC.  The link posted by Mr Lynn on a speech from the Comptroller was from early 2006.  It's time to change or adjust that strategy to work in partnership with the other measures we are taking.

      The more people that are aware of issues like this, the more chance there is that something can be done to change it.  This is just one exemple of what can/will become a national issue.  Commercial real estate has not been affected much - yet.  If banks start foreclosing or refusing to renew, and a glut of commercial property goes on the market all at once, there will be another crisis.  I think that can be avoided.

      •  At any given time (1+ / 0-)
        Recommended by:
        polar bear

        government always has competing objectives. I remember going to a HUD seminar for non-profit groups applying for housing development grants. There were about 14 HUD reps at the speakers table. One of the left hand end got up and talked about the criteria to maximize the participation of minority groups. Then another got up and talked about the criteria to maximize financial solvency. It was so obvious that they were at cross purposes with each other that the audience broke out in laughter. However, both considerations were written into the law.

        I think that it was a lack of regulation that allowed banks to become seriously over extended. Some way that has to get cleaned up. It is much more difficult to do that in the midst of a serious recession. It is not going to be an orderly or pain free process.

    •  This is what a melt down looks like. (0+ / 0-)

      In normal times the interests of the society, individuals and financial institutions are basically aligned.

      These days what’s good for the bank is not good for society and what’s good for individuals is not good for the economy.

      It is in individuals interest to hoard cash, cut their spending and not invest in equities. It is in banks interest to hoard cash and not lend. All of that adds up to a lousy economy for everybody.

      Only the government can turn it around. We have been here before and we ought to know what to do.

      We shall overcome, someday. Yes we can.

      by Sam Wise Gingy on Thu Mar 12, 2009 at 08:45:02 PM PDT

      [ Parent ]

  •  How big a building? R they using all of the space (1+ / 0-)
    Recommended by:
    polar bear

    what is the cost per sq.ft. It might be possible to buy them some time if the deal is structured right.

    Ecosystems empowerment for the rural poor.

    by 1Eco on Thu Mar 12, 2009 at 04:32:42 PM PDT

  •  This is outrageous I feel yout frustration (3+ / 0-)

    at least I can forward your post to my Reps.  You should send this is to the White House as one of their 40,000 letters a day.  The President gets 10 of them - you never know.

    "Write your life in ink..."

    by Caringthinkingperson on Thu Mar 12, 2009 at 04:36:18 PM PDT

  •  somebody influential needs to talk to someone (1+ / 0-)
    Recommended by:
    yoduuuh do or do not

    on high and redirect some of this money to these lease holders, like the mortgage holders.  Especially the ones like Rude Dog is talking about that have nothing to do with residential construction; they are just business in a building.

    I hope that Congress refuses to provide any more money until we help all of us mortals here on earth.  i have a feeling they will just do an end run around Congress by using a separate fund to give "loans" to the masters of the universe, based on equity that we have given them.  i may have the terms wrong, but the general idea stands.

  •  We need evidence-based government (1+ / 0-)
    Recommended by:
    polar bear

    And we still don't have it.  I hope it doesn't take too long for this particular business.  Here we have, not a basketcase, but rather a going concern, a viable, profitable business that is going to be closed down because of an idiotic, arbitrary rule that does not even take risk into account.

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