Straight Talk

Originally appeared April 1, 2009

Straight Talk
by Tom Bengtson

Straight Talk: Bankers need time

Many banks are struggling with distressed real estate, both commercial and residential. The bottom quickly fell out of the real estate market, which is currently – and temporarily – at a standstill. Policymakers, rightly concerned about the condition of the banking industry, have launched and proposed several costly programs for restoring industry health. Billions of dollars have been set aside for capital infusions of one form or another, although to date most of the money has gone to the industry’s larger players.

Here’s the thing, though. Most banks don’t need money; they need time. Resolution to the real estate-related crisis in banking doesn’t need to cost the U.S. Treasury (taxpayers) anything. Until real estate market activity returns to pre-recession levels, bank regulators should suspend the mark-to-market rules for real estate non-performing assets and allow banks to amortize the losses over a period of up to 10 years. Losses are never easy to deal with, but the issue here is the abrupt change in real estate values; banks would remain stronger if they were allowed to absorb losses over several years rather than be required to book them all at once.

Under today’s mark-to-market rules, when a bank forecloses on a piece of real estate and moves it to “Other Real Estate Owned,” it must order an appraisal and carry the asset on its balance sheet at the lower of the loan amount or appraised value. In a depressed real estate market where there are no buyers except bottom-feeders, this results in catastrophic losses of income and capital. Suspending mark-to-market accounting in this manner will stem the tide of losses and stabilize the capital position of banks. If Congress allows banks to write down the real estate-related loan deficiencies by 10 percent per year over a period of 10 years (half for principal reduction and half for real estate taxes, insurance and administration) the result will allow for effective disposal of these non-performing loans in 10 years or fewer.

This is the way to stabilize banks struggling with substantial real estate problems. Regulators understand the concept; they permitted the amortization of losses on real estate during the farm crisis of the 1980s. I am suggesting they resurrect this kind of regulatory accounting system for the current environment.

Most bankers in the Midwest don’t need a bailout or a hand-out of any kind. Most of those struggling simply need time to manage the effects of the current situation. Congress and bank regulators should change the accounting rules to allow bankers to exercise their management in a manner that preserves their bank, maintains the strength of the industry, and respects the taxpayer.