U.S. Will Set Guidelines to Modify Commercial Real-Estate Loans

By Alison Vekshin

Oct. 14 (Bloomberg) -- U.S. bank regulators, saying losses on souring commercial real-estate loans pose the biggest risk to lenders, will issue guidelines to help the institutions modify the agreements.

Reduced demand for space has led to falling rental rates, adding to losses on the loans, leaders of the Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and Office of Thrift Supervision said in remarks prepared for delivery at a Senate Banking Committee hearing today.

“The most prominent area of risk for rising credit losses at FDIC-insured institutions during the next several quarters is in CRE lending,” FDIC Chairman Sheila Bair said, referring to commercial real estate. “Prudent loan workouts are often in the best interest of financial institutions and borrowers.”

Large concentrations of commercial property loans are behind many of the 123 banks that failed in the past two years, draining the FDIC’s deposit insurance fund. Commercial real- estate loans totaled almost $1.1 trillion as of June, representing 14 percent of all loans and leases, Bair said.

Federal bank regulators will soon issue guidelines on commercial real-estate loan workouts, Bair said without providing specifics.

“The guidance we are working on is intended to promote supervisory consistency, enhance the transparency of CRE workout transactions, and ensure that regulatory policies and actions do not inadvertently curtail the availability of credit to sound borrowers,” said Timothy Ward, the OTS’s deputy director of examinations, supervision and consumer protection.

IndyMac Program

Bair pressed the mortgage industry last year to accelerate its modification of troubled home loans to curb rising foreclosures. The FDIC used its program to modify troubled mortgages held by IndyMac Federal Bank FSB, successor to the failed lender the agency inherited in July 2008.

U.S. banks recorded losses for residential construction and development loans that have defaulted and “a number will continue to produce losses that result in more bank failures,” Comptroller of the Currency John Dugan, regulator of national banks, said in his testimony.

Commercial real-estate and construction and development loans “are a significant examination focus right now,” Bair said.

To contact the reporter on this story: Alison Vekshin in Washington at avekshin@bloomberg.net.