Foreclosures Remain Huge Problem for Small Banks

With the crush of foreclosures, analysts have implored smaller banks to dump bank-owned properties, even if it means taking a big loss.

Many bankers agree that’s what they should do, but mandatory appraisals have been a sticking point. Accurate values are hard to come by, so potential buyers are often scared off by appraisals that seem too high, or bankers get skittish that they’re selling too low.

As a result, hundreds of community banks still have huge levels of other real estate owned, or OREO, on their books. At Sept. 30, more than 150 banks with assets of $5 billion or less had OREO levels exceeding their tangible equity. Some of those banks have since failed, including Central Progressive Bank in Lacombe, La., and Polk County Bank in Johnston, Iowa.

There is little sign that OREO levels will decline anytime soon, says Steven Sandler, chief executive of Crosswind Capital LLC, a private-equity firm that buys distressed assets. “2012 will be just as heavy a year as 2011,” he says.

Brian Olasov, a managing director at McKenna Long Aldridge LLP, says OREO levels will remain problematic with regulators pressuring smaller banks over appraisals. “As long as some bank examiners deem an appraised value as the be-all and end-all of property loan values, banks will manage property loan books and OREO portfolios to minimize current capital writedowns,” says Olasov, who advises banks on real estate holdings. “I don’t see that changing, absent legislative fixes.”

Action from lawmakers seems unlikely, Sandler says. “No community bank by itself poses any systemic risk,” he says.

Appraisers will likely continue to overlook the sales of distressed properties in surrounding areas when valuing properties, Sandler says. That practice will continue to skew values upward, which “may make the boards of the community banks happy because it justifies their continued reliance on extend and pretend, but it doesn’t clear the OREO inventory,” he says.

Ken Chitester, a spokesman for the Appraisal Institute, says it is difficult for an appraiser to come up with an accurate value when there are few accurate comparable sales to use as a guide. He says the best solution for a community bank is to hire an accredited appraisal company, not an appraisal management company looking to churn out appraisals at the lowest possible cost.

The poor health of the real estate market is not helping. “Until we see the real estate market meaningfully improve, I don’t think, particularly on the one-to-four-family-home side, you will see OREO balances significantly work down faster than we’ve seen in previous quarters,” says P. Carter Bundy, an analyst at Stifel, Nicolaus Co. “It’s going to be a long workout processes and there will be a lot of costs involved.”

HCSB Financial Corp. in Loris, S.C., said in a regulatory filing that it incurred about $3.3 million in costs tied to OREO for the first nine months of 2011, up 16% year over year. The $544.4 million-asset company said the costs included “legal fees, taxes, insurance, utilities [and] property management company fees.”

The federal government is exploring ways to get foreclosed properties off its own books. The Obama administration is looking at a way to convert government-owned foreclosures into rental properties. The plan ideally would help stabilize home values.

Some banks can’t dump OREO, because of capital issues. That situation is unlikely to improve much in the near term, says Chris Marinac, an analyst at FIG Partners LLC. “A bank approaching a 4% Tier 1 leverage ratio is going to have to think long and hard on how aggressive it writes down OREO,” Marinac says. Falling below such a threshold is “unpalatable” for a bank because it often triggers the Federal Deposit Insurance Corp.’s process of preparing for a failure, he says.

“Some banks don’t have the liquidity to write off $300,000,” says Rob Whitmire, a partner at Bull Realty Inc., an Atlanta brokerage firm that represents community banks in asset sales. “It’s almost an impossible feat for them because, in some cases, it would shut them down.”

The lengthy process, required in some states, of getting a judge’s approval before a foreclosure can occur is also forcing banks to hold OREO longer than they prefer. While appraisals may be legally required, many bankers feel they can’t establish a price range without them. “Appraisals rule the day for most of these community banks, for good or bad,” Whitmire said. “They just wait until the appraiser tells them what it is worth.”

Daily Briefing | Friday, December 16, 2011

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    With Congress moving closer to raising the guarantee fee on Fannie Mae and Freddie Mac loans, a proposal to hike Ginnie Mae fees by an equal amount is being circulated on Capitol Hill, National Mortgage News has learned.

  • California Lender Closes East Coast Operations

    O2 Funding, Foothill Ranch, Calif., late this week closed its East Coast mortgage production operation, electing to concentrate on West coast lending, according to industry officials familiar with the matter.

  • New Measure Asks for FHA Recapitalization

    Senator David Vitter, R-La., late this week introduced legislation that would pressure the Federal Housing Administration to recapitalize its single-family mortgage insurance fund in two years.

  • Nevada Sues LPS for Foreclosure Fraud

    Nevada’s attorney General Catherine Cortez Masto this week filed civil fraud charges against Lender Processing Services and two subsidiaries alleging the company engaged in a widespread fraud of forging foreclosure documents.

  • SEC Sues Former GSE Chiefs Over Nonprime Disclosures

    The Securities and Exchange Commission on Friday sued Richard Syron, the former chief executive officer of Freddie Mac, and Daniel Mudd, ex-CEO of Fannie Mae, over disclosures they made about subprime assets the GSEs invested in.

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    Rank and file workers at the Federal Housing Finance Agency, Fannie Mae and Freddie Mac this week were told that there will be no “merit salary” increases in 2012, according to a memo provided to National Mortgage News.

  • Fannie Exec: Pricing of MF DUS REMIC Draws Large Orders

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  • NAMB Takes Exception to Presidential Put-Down

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  • 10-Year Drops, Mortgage Rates May Fall Again

    Friday morning, the yield on the benchmark 10-year Treasury fell to lows not seen in the last couple of months, a sign that mortgage rates will stay low.

  • Signs of Life in California Housing Market

    California home sales rose 2.1% in November on a sequential basis, and were up 2.3% compared to the same month a year ago, according to the state’s premier Realtor group.

  • Trial Starts in Alabama ‘Silent Seconds’ Scam

    Alabama prosecutors opened a trial this week against a woman accused of helping her brother run a sophisticated fraud that helped obtain millions of dollars in fraudulent mortgages from First Educators Credit Union in Birmingham and other lenders to finance condominium rehabs at the Gulf Shores resorts.

Article source: http://www.nationalmortgagenews.com/dailybriefing/2010_498/foreclosures-huge-problem-small-banks-1027904-1.html

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