Small Banks to Amortize Real Estate Losses

WASHINGTON, DC-A new bill introduced by US Reps. Ed Perlmutter and Mike Coffman might, if it is passed into law, alleviate some of the pressure small banks are experiencing with lending to commercial real estate projects. The bill, HR 5249, Capital Access for Main Street (CAMS), will temporarily allow small banks with under $10 billion in assets to amortize their losses on commercial real estate over a seven-year period.

Small banks have been decrying what they say has been a stepped-up campaign by regulators to clamp down on all commercial real estate lending--no matter how safe the transaction’s fundamentals or how well the bank is familiar with the borrower’s business and balance sheet. Regulators, for their part, have been taken to task for falling asleep at the wheel on this matter and are loathe to repeat the same mistakes.

This bill would also address, to a certain degree, some of the debt that is coming due in the next few years that will be unlikely to find refinancing. Small banks have not been able to deploy the so-called ‘extend and pretend’ policies of larger banks and instead, under current rules, have to write down this debt immediately.

This bill could free up significant amounts of capital in the short term for additional CRE lending, Thomas Maxwell a partner in law firm Barnes & Thornburg’s Business, Tax and Real Estate Department who works with community banks, tells GlobeSt.com. "Permitting banks to amortize over time rather than recognize immediate losses in their portfolios--in this case, their real estate portfolios--will allow them to maintain sufficient capital to continue making loans rather than building up their reserves," he says.

That said, there are doubts in the industry as to whether the bill would have any impact on liquidity in the market. "I would caution that amortizing commercial real estate losses is diametrically opposed to the prevailing policy of regulators to aggressively require strict write-downs and write-offs of commercial real estate loans," Bowman Brown, chairman of Shutts & Bowen LLP in Miami, tells GlobeSt.com.

There are other reasons as well why the bill is unlikely to have an impact, says Jeffrey Rogers, COO and president of Integra Realty Resources.

First, he explains to GlobeSt.com, the bill is aimed at increasing access to capital for small business in an effort to simulate job growth. "Many small businesses have been lobbying congress to aid them in securing capital as the lack thereof is preventing hiring and investment. If the bill is targeted correctly, there will be restrictions on the aid--such as loan guarantees--so that the loans will be funneled to small businesses."

Second, commercial real estate is still considered a risky asset class to many small banks, he continues. Thus, even if the small and community banks had more access to capital to lend, they are not likely to increase their exposure to commercial real estate at this time. "Most of the small banks are still working through their troubled portfolio of real estate related loans and the appetite for additional exposure to CRE is just not there for many of these banks."

Lastly, Rogers says, the FDIC is still actively shutting down small banks and will be for some time. "As with the prior government sponsored programs, I am not confident that the government will have the correct measures in place to properly target small businesses. Nevertheless, if small banks have the opportunity to become more stable through this bill without the need to necessarily lend, they will take a conservative route and keep lending tight especially real estate related loans until they work through this crisis period," Rogers concludes.