Something’s up with the FDIC. At this economic blog, a letter from a real estate developer:
I work in the construction business and something has been creeping to the forefront of my attention for the past few weeks and now it seems to be moving full steam ahead.
Banks are forcing developers/builders (especially smaller ones) to give up their properties (unsold homes and lots).
Banks say the reason is that the properties in question are no longer performing assets. I am sure there are some loans out there that are not performing and the owners are going under. I am equally sure that there are plenty of developers that are still selling homes – just not at the pace originally planned on the pro formas.
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Down in the comments, we have this:
Your construction industry source raises an interesting issue. Since I work for a relative healthy bank, I don’t see that in my bank.
However, we have had federal auditors in the bank for the past couple weeks and I’ve noticed an interesting development. They are getting tougher on banks recognizing loans that they view as a problem and pushing for downgrades.
So, the very problem might be federal auditors are forcing banks to down grade loans to a doubtful status. In such cases as nonperforming real estate assets, this essentially forces the bank to do something more than wait and see if the developer can turn his investment and pay off the bank.
It forces banks to resolve the issue mostly by enforcing their rights on the collateral, which is why they are probably recommending the developer walk away, so they can their hands on the collateral sooner (maybe deeding it over to the bank) versus going through foreclosure and potential bankruptcy on behalf of the client, which can draw out the process for months.
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So what does all of this mean? It means that the FDIC is turning the screws on the banks to get the non-performing loans off the books, even if it means trading something with a glimmer of hope of performing a ways down the road for collateral that has zip, zero, nada market.
Or does it? A large investor, with deep pockets (quite likely foreign) might be just waiting in the wings to snap up these distressed assets at fire-sale prices. Alternately, the banks with deep pockets may want to push the ones with less deep pockets over the edge (i.e. the ones choosing to receive TARP funds may want, with the connivance of the Feds, to push the ones who chose not to take TARP funds over).
In the long run, of course, a clearing of excess inventory is both a good and necessary thing. But pushing teetering banks over the edge, and taking marginally viable development businesses with them probably isn’t the best plan for the weak economy right now. But I can see no end of players, both inside and outside of the country, who would stand to gain from this.
Most transparent administration in history, my itching butt.
Update: Heh™:
