Friday, January 2, 2009

Regulations? Really?

The AJC has an article about how lots of homebuilders are going bust because of foreclosures. The article focuses on banks foreclosing on properties, and is full of quotes like this:
Mounting loan losses erode a bank’s worth and put it at risk of running afoul of regulators, who can order a bank to make changes or even shut it down.

“The regulators are hammering the banks for not following the strict interpretation of all the rules, especially as they relate to residential real estate construction,” said Joe Brannen, president of the Georgia Bankers Association. “Unfortunately, this gets perceived and portrayed as banks not being willing to work with our borrowers.”

A bank that modifies a troubled loan to help a builder still carries a troubled loan, so its financial picture hasn’t improved.
I'm glad they've figured out that regulations are why homebuilders are going bankrupt. It wasn't that they overbuilt, or that the banks made bad loans in the first place, or that no one is buying houses right now. Nope, none of the basic market facts. Regulations.

What sort of regulations are they talking about? I am not a banker, nor am I that familiar with the particular regulatory codes for commericial real estate loans. So I could be way wrong on this, but I glean from the article that it is the same mark-to-market accounting practice that helped tank banks carrying sub-prime loans:
“It appears that there is not-so-subtle pressure from regulators to get new appraisals and immediately write down loans based on them,” said Steve King, president of the Greater Atlanta Home Builders Association. “When that occurs the banks often decide that they are better off foreclosing, since they have already been forced to reduce the value of the loan on their books.”
So the onerous regulatory pressure killing homebuilders is an accounting practice forcing banks to mark all these bad loans down to their current value. They are forcing banks to carry the actual value of the loans on their books, instead of pretending that acres of vacant home sites are still worth what they were a year ago.

I call B.S.

The article notes that 40% of Georgia banks are unprofitable, and that five Georgia banks got shut down last years. I'm guessing that just trying to stay solvent has a much greater effect than regulations on the rate of foreclosures. Banks need cash right now (remember that whole bailout thing?), and reworking loans to wait for homes to sell doesn't bring in any cash. Foreclosing and selling the developer's home, even at a loss, does.

The issue isn't how they "look" to regulators, it is whether they can survive. If I were a banker, I'd want to reappraise my bad real estate loans regardless of whether I had to for regulators. I'd want to know how much I stand to lose, and whether it was realistic that the loan would ever actually perform. Even the GAHBA president notes that regulations aren't forcing banks to foreclose per se, but that once banks realize how bad these loans really are they decide it makes more sense to just get out of them and move on.

I guess the Banker's Association point is that regulators can seize a bank if their financial picture gets too bad, but I have a hard time blaming regulators for banks that get themselves into such bad positions. If the banks hadn't made tons of bad loans, then they wouldn't have to worry about whether regulators thought they were going to collapse or not.

I have commented before that as a blogger, it is very easy to make a fool of myself. I would love if someone with banking experience corrected me if I'm wrong since there isn't that much to go on in the article, and my own knowledge of banking regulations is limited to an intro accounting class.

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