Local Banks Lose from Foreclosed Bank Owned Properties

by Simon Lindsay on Foreclosure Crisis

Before 2010 ends, 940 small and medium-sized banks across the country would have lost $100 billion from foreclosed bank owned commercial properties if the economic downturn worsens further, according to a Wall Street Journal study.

The Journal examined filings submitted by banks to the Federal Reserve and analyzed the financial conditions of 940 medium-sized and smaller banks. It used the loan-loss method applied by the Fed when it conducted stress tests on the country’s 19 largest banks.

According to Journal analysts, total losses of all the studied banks could exceed $200 billion by next year’s end if the problems that cause the rise in foreclosed bank owned properties are not solved. The analysts applied the worst-case scenario method used by Fed officials in their stress tests for the 19 large banks. Using the worst-case scenario method, the capital of over 600 of small and medium-sized banks would fall to risky levels.

Potential losses on foreclosed bank owned commercial properties are the biggest problems faced by small and medium-sized banks. These could reach a total of $49 billion, much more than their potential losses on foreclosed bank owned homes. The capital levels of about 33 percent of the small and medium-sized banks could drop to levels that would not only worry the banks but also federal regulators.

Commercial loans provided by the 940 banks have been used to fund the building of office buildings, shopping centers, apartment complexes, hotels and other commercial buildings.

The Journal’s findings show the extent of struggles of small and medium-sized banks, which have been battered by the economic downturn and the housing collapse that brought about a lot of foreclosed bank owned properties.

Oppenheimer analyst Terry McEvoy said the small and medium-sized banks are in much worse conditions than the large banks because the small banks’ earnings power cannot match those of the large banks.

Also, there are only a few small banks which could attract banking investors looking for bargains to recapitalize. Small banks have been boosting their capital by reducing the number of loans originated and by selling some assets.

Allen Tischler, a top credit executive at Moody’s Investor Service, explained that tighter lending could prolong the downturn, as developers who could not obtain loans would not be able to save their projects from foreclosures.

Nevertheless, bank analysts do not see a scenario similar to what happened in the late 1980s when 1,256 banks closed. They are optimistic that many small and medium-sized banks can survive the problem of foreclosed bank owned properties.