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US Banks Prepare for Losses in Rush for Commercial Property Exit

Garrett Townsend — Tue, 13 Jun 2023 08:11:10 +0000

Some US banks are preparing to sell off property loans at a discount even when borrowers are up to date on repayments, a sign of their determination to reduce exposure to the teetering commercial real estate market.

The willingness of some lenders to take losses on so-called performing real estate loans follows multiple warnings that the asset class is the ‘next shoe to drop’ after the recent turmoil in the US regional banking industry.

“The fact that banks want to sell loans is coming up in a lot of conversations,” said Chad Littell, an analyst at CoStar, a research company focused on commercial real estate. “I am hearing more about it than any time in the past decade.”

HSBC USA is in the process of selling hundreds of millions of dollars of commercial real estate loans, potentially at a discount, as part of an effort to wind down direct lending to US property developers, said three people familiar with the matter.

Meanwhile, PacWest last month sold $2.6bn of construction loans at a loss. And a clutch of other banks are making it easier to execute similar sales in the future by changing the way they account for commercial real estate debt.

Typically, banks are reluctant to accept losses on big blocks of loans that will retain their full value as long as borrowers make repayments on time. But some are being convinced to take the plunge amid fears of an increase in delinquencies — especially on debt secured against office properties that have experienced falling demand because of the enduring popularity of working from home.

Meanwhile, a slowdown in demand for commercial mortgage-backed securities has left banks of all sizes holding on to more property debt than they or regulators would like.

While the practice of offloading performing loans is not as prevalent as it was during the 2008 crisis, many market participants expect the volume of deals to increase this year and next.

As banks prepare to close the second quarter “they are super focused on keeping a clean loan book”, said David Aviram, a principal at Maverick Real Estate Partners, a private fund that specialises in commercial real estate loans. “The banks don’t want to raise the concerns of regulators or investors.”

The moves to offload the loans come as executives and regulators raise alarm bells over the health of the commercial real estate sector.

Wells Fargo chief executive Charlie Scharf last week told analysts and investors that the bank, which has $142bn in commercial real estate loans outstanding, is managing its exposure to the area. “We will see losses, no question about it,” he said.

Meanwhile, Martin Gruenberg, chair of the US Federal Deposit Insurance Corporation, last week warned real estate loans — especially those backed by offices — face challenges if demand remains weak and “values continue to soften”.

“These will be matters of ongoing supervisory attention by the FDIC,” he added.

Other banks are changing the way they account for loans by switching their designation to “available for sale” from “hold to maturity”, a move that makes it easier to offload the debt down the line.

Citizens, which has been reducing its commercial property lending, more than doubled its stock of loans available for sale to $1.8bn during the first quarter. Like many other banks, it does not disclose what percentage of those loans are to commercial real estate borrowers.

Customers Bancorp, based in suburban Philadelphia, cut its commercial real estate lending by nearly $25mn in the first quarter. It also recategorised $16mn of these loans as “held for sale”, up from zero in the previous quarter.

One loan broker said it was preparing to bring several deals to market in the coming weeks and was experiencing the largest amount of activity in three years.

The discounts applied to sales of performing loans outside of the office sector remain relatively modest and are driven partly by interest rate rises.

Real estate investment group Kennedy-Wilson, for instance, agreed to pay $2.4bn, or 92 cents on the dollar, for the block of PacWest loans that had an aggregate principal value of $2.6bn. Shares of PacWest surged nearly 20 per cent after it announced the transaction.

“We’re getting more calls . . . as a result of what PacWest was able to execute with Kennedy-Wilson,” one real estate credit investor said. “All the regional banks are looking at that stock price and saying ‘the market really liked that and we should execute something similar’.”

According to two of the people briefed on the HSBC sales process, the loans are fetching bids that would price them in the mid-90s as a percentage of their face value — meaning the bank would have to take a loss of as much as 5 per cent.

HSBC has not decided whether it is willing take a loss on the sale or how large one might be, said another person familiar with the process. HSBC declined to comment.

Source: Financial Times

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RBI Panel Recommends Penalties for Banks if They Lose Your Property Documents

Cecil Vega — Sat, 10 Jun 2023 08:01:15 +0000

The BP Kanungo committee, established by the Reserve Bank of India (RBI), has proposed that banks and lenders who provide home loans should compensate borrowers and pay a monetary fine if they lose the borrowers’ property documents. Typically, banks and lenders request original property documents and retain possession of them until the loans are fully repaid.

These recommendations were included in a committee report released on June 5th, which outlined various suggestions for enhancing customer service standards in regulated entities. In May 2022, the RBI formed a six-member committee, chaired by BP Kanungo, with the objective of examining and reviewing customer services in regulated entities to safeguard customer interests.

Original property documents play a crucial role in establishing ownership, preventing disputes, facilitating future transactions, complying with legal requirements, and accessing property-related information. Ownership documents, such as the title deed, serve as irrefutable proof and legal validation of one’s property ownership. Holding these documents in their original form also reduces the risk of potential disputes or fraud in the future.

Adhil Shetty, CEO of BankBazaar.com, explains, “If you need to sell the property, transfer ownership, or utilize it as collateral for another loan, having the original documents is necessary to expedite the process.” He further emphasizes that the loss of property documents can be a significant problem.

The committee has proposed guidelines for handling property documents while closure of the loan accounts after several instances were brought to the notice of the committee where the regulated entities (lenders) had misplaced the property documents taken by them as security for a loan and failed to return the documents / return them promptly when the loan was fully repaid by the borrower.

The committee further suggests regulated entities may be required to pay a penalty/compensation for delay in returning documents. “Further proposes assisting customers in obtaining certified copies and providing adequate compensation in cases of lost documents,” says Ankit Rajgarhia, Principal Associate, Karanjawala & Company, Advocates.

The RBI has invited comments from stakeholders by July 7 on recommendations given by the committee to address this issue by the regulated entities.

Lenders need to keep the original documents safe

The committee has observed that the banks follow different practices with regard to safe-keep of property documents accepted by them as security. While some keep them at branch, others keep them with controlling offices, yet others at head office. Failure to return the documents in time causes avoidable hardship to the borrower and can even lead to pecuniary loss.

The committee recommends keeping the security documents by the regulated entities in the digi-lockers as this will facilitate easy retrieval in case the physical documents are misplaced.

Provide a time limit to return the documents

The Reserve Bank may consider stipulating a time limit for the regulated entities to return the property documents to the borrower from the date of closure of the loan account, failing which a penalty / compensation linked to the extent of delay should automatically be paid by the regulated entity to the borrower.

Where’s the compensation?

The lender has a responsibility to maintain the property documents submitted to avail a loan. In case the lender fails to do so, it might be mandated, as per the recommendations given in the report, to provide the borrower with a viable alternative.

“This is very relevant because if the property documents are lost or misplaced, it may be very difficult, if not downright impossible, for the average person to obtain duplicates by themselves,” says Shetty. He adds that the legal processes are complicated by the fact that the documents were lost or misplaced by a different entity altogether.

When this recommendation is implied by the RBI, customers can rest assured that not only are their documents safe with the lender, but the lender will also provide them with certified duplicates in case the originals go missing for whatever reasons. “This has been a long-standing concern of borrowers, and this change will go a long way in reassuring borrowers regarding the safety of their property documents,” says Shetty.

Source: Money Control

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