A recent ad campaign for Staples featured a button that customers could push to solve their office supply needs, once completed the button responded "That was Easy". Wouldn't it be nice if we could press an FDIC button that would solve many of the pending problems and help the President's plan to stimulate the economy? Interestingly there may be just such a solution for a part of the problem.
Most experts agree that increased defaults of commercial real estate loans are quite possibly the next shoe to drop, and this one has the potential to not only stifle the recovery that the President and Congress have bet the farm on but could be the tipping point to take us from recession to something worse.
Commercial Real Estate loans have been made by different types of lenders and can default for a number of reasons, even though the borrower may be able to maintain payments and keep current with the obligation. Today, there are literally hundreds of Billions of Dollars of loans that have matured. If a borrower cannot refinance then the loan is in default and the asset moves from the performing side of the balance sheet to the non-performing side. Additionally, most commercial loans have covenants that require borrowers to maintain a certain occupancy level or cash flow ratio and if they fall below minimum standards they become "bad assets".
Because of government regulations non-performing assets diminishes the bank’s bottom line and can put them in jeopardy of failure. In an effort to comply with regulations, banks have to make a hard decision, write down the asset, take a loss and foreclose or press the borrower to sign a forbearance agreement that more often than not simply postpones the inevitable.
Failed CMBS Loans are part of the problem but remain unregulated. It has been estimated that there are Hundreds of Billions of dollars of loans maturing every quarter for the next few years. As many banks and institutions hold portions of these loans the downgrading of share price will continue to diminish values across the board. Refinancing these loans creates an additional drain on the supply of money which in turn restricts capital for business's from Wall Street to Main Street. As bleak as this all sounds, there may be a simple solution...
We propose that the Treasury, the FDIC and the IRS be given temporary authority to allow lenders to extend terms on loans that have matured so long as the borrowers are current with their payments, regardless of current appraised values. These temporary regulations would allow lenders to extend terms for up to five years and to revise covenants regarding occupancy levels or debt coverage without penalty or write down in asset value.
Some will no doubt argue that a program of this nature will simply prolong the inevitable but that is simply not true. Many of the commercial assets are perfectly good properties that are well managed and capable of supporting the loan payments. The effect of dumping thousands of good properties onto the market because of technical defaults exacerbates the situation and creates a self fulfilling prophesy.
The President has implemented a bold and some say risky program to help our nation recover. There have been unprecedented actions taken from TARP to the takeover of GM. Programs like the now uncertain PPIP program was focused on selling possibly Trillions of Dollars in bad debt, yet not all or even most of it needs to be sold. Why does anyone think it would be better to foreclose on a property because of a technical default and then sell it for a fraction of what it cost to build or what it's really worth verses allowing the ownership to continue on when they can?
Another argument we can predict is that loose regulations caused the current crisis and we need more Federal Regulation not less. I am reminded of Will Rogers when he quipped, "I'm from the government and I'm here to help." The truth is, creating temporary regulations for banks and other financial institutions that allow technical defaults to be cured so long as payments are being made is a reasonable and practical way of solving a part of our financial woes.
Some will worry what the international community will say or how we will need by-in from the IMF. The USA has always been know for our innovation and ingenuity. Allowing banks and CMBS lenders to extend the terms for Hundreds of Billions in commercial loans will relieve the pressure on the supply of capital and allow business's more access then they have had since early last year. These temporary actions should allow for significant improvement to balance sheets of banks and institutions which should stimulate the stock markets around the world and return lost wealth to the masses. The button is in front of us, it can be that easy if only our elected officials and leadership at the Treasury, the FDIC, and the IRS seize the moment?
We have some ideas on how to help resolve the CMBS crisis and well as pension, trust and insurance portfolio ratios that can also have a positive impact on the recovery.
