Real Estate Focus

Bankers do not need special powers to realize the difficult times are far from over. As a former banker, I know that even a banker has sufficient insight to understand the issues with their real estate collateral will haunt them for a while to come. What is a banker to do?

For starters, the remaining two reporting quarters of this year are opportunities to do some substantial write-downs. Taking their cue from the old adage "The first loss is the best loss", lenders will aggressively increase reserves and move properties into the "work out" departments. I expect they are working late nights for the rest of this week to see how big a hit they can put onto the third quarter ending September 30. The fourth quarter will also be a time to continue the ritual bloodletting and if anything, over compensate for problems loans.

Here is the rationale: the stock price has already been pummeled. The street has anticipated the hits. But as investors have been unsure of the magnitude of the problem, they may have been overly pessimistic in bidding down stock prices. Aggressive moves now will show that bank management is asserting control of a bad situation. If things turn out to be as bad as these aggressive actions anticipate, then management was right on the money. If things turn out to be better than these aggressive moves, then management is in the enviable position of claiming credit for a job well done (or at least better done than feared). So at this point in time, managers can run the risk of over estimating the damage. But they cannot run the risk of underestimating the damage, as both investors and boards of directors would be forced to severely punish their poor performance.

Expect the following from the Lenders:

• Substantial write downs through increases to loan loss reserves
• Expanded Real Estate Work Out Departments
• Expanded Real Estate Owned Departments
• Creative approaches to work outs which would include recasting loans and keeping competent developers and owners as borrowers even on troubled projects. It is far easier and probably cost effective for the lender to keep the guy originally trusted to work through the project and make the deal successful; instead of taking back a property and attempting to do a direct work-out or re-sell the property in a distress situation.