05/24/10
The New Fed Guidelines on Loans on the Books - The Trickle Down Effect!
I am the Managing Director of Focustar Capital Group, LLC. We have a client who requested that their $17,000 loan be modified to interest only payments for 12 months. (This request would postpone about $700/month of principal payments to the end of the loan and likely extend a 60 month loan to 72 months.)
They have never missed a payment before but the recovery has not yet offered them an improved economy and they forecast that the next 6 months or so could continue to be rocky for their business and instead of missing scheduled payments they want to work it out in advance with the lender. In addition, they lease office space from a real estate company the owners of which is the business owner who made request and another developer friend.
After about a month, the bank (which was just forced by the Fed to merge with a larger bank!) came back to them and said that if they modify the loan, it will trigger a red flag. That flag will make them look at the client's credit worthiness overall. They will then conclude that because the client needs a modification on the $17,000 loan that they may not be able to pay their office rent to their real estate company. (They also loaned the real estate company $800,000 on the building in 2007 when times were great and the real estate company has never missed a payment either. Is the building worth $800,000 today? I doubt it but that's not the issue, or is it?)
They will then determine that because this client needs a loan modification on the $17,000 and therefore may be at risk for not paying the rent to the real estate company on time, that the $800,000 loan is in jeopardy and that the Fed requires an immediate reappraisal of the building and a phase one environmental study which will cost the real estate company about $5,000 of which our client will be responsible to pay half! To order a phase one environmental study for this building is ridiculous, but I don't want to go there now.)
Further, because the $800,000 real estate loan may now be in jeopardy, the partner's entire borrowing portfolio with that bank may need to be reviewed and perhaps new appraisals and environmental studies will have to be ordered on his real estate investments to determine (1) that their value today is lower than it was at the time the loans were place on the books (no shock here), and (2) to recognize that these new values are outside of current Fed guidelines. What is the point? Does the bank want to foreclose on perfectly performing loans because they no longer meet Fed guidelines? I don't think so.
The real estate company has no choice. The bank will order the reports to meet Fed guidelines, the bank will pay for the reports and the real estate company will owe the $5,000 to the bank on top of the $800,000 it already owes!
The client that wants a temporary payment reduction of $700/month for 12 months will have to pay $2,500 (his share of the meaningless $5,000) to the bank for these reports just to satisfy a Fed requirement!
Who knows what will happen to the developer friend's portfolio with that bank? He has partners too. How many reports will they have to pay for just because the client made a principal deferment request?
The problem here is that no one loan is unique. The new system of global cash flow underwriting (probably a good idea in some form for future applications) has forced every loan and every guarantor into a seemlessly neverending web of bureaucratic mania. Until this madness is mitigated, there will be no significant lending. Loans don't get made without collateral and the collateral is all tied up in market reductions through newly forced appraisals resulting from principal modification requests of $17,000! Welcome to banking 2010. jf
