FDIC Moves to Stave Off Distress

Two recent moves by the federal government will further help lenders and owners ride through the storm by providing cover to keep amending and extending loans. But the impact, and consequences, of each move are a source of debate within the finance community.

In the fall, the IRS announced a new rule allowing CMBS loans to be modified without triggering massive tax implications. And in late October, the FDIC clarified a rule, basically allowing banks to extend and amend loans without triggering higher capital reserve requirements.

Both policies apply to performing loans that are hurt by either a weak local market or the lack of liquidity available on the market to refinance.

The FDIC’s policy clarification, announced last month, had an immediate effect on some borrowers. A member of the National Apartment Association said that his bank called him hours after the FDIC announced the policy and agreed to do a workout and two refinancings that he’d been asking for.

“The bank wanted to do the deal, but were waiting for confirmation that they wouldn’t get hit,” says David Cardwell, vice president of capital markets for the Washington, D.C.-based National Multi Housing Council. “The fact that it happened the same day tells me it’s a very positive thing for the industry.

The policy is also a signal that the government believes sunnier days are ahead and waiting for the capital markets to pick up is a better bet than forcing foreclosures now.

“It was definitely a sigh of relief for the lending community,” says Dan Fasulo, managing director of New York-based Real Capital Analytics. “Just about every asset purchased over the last few years has broken loan-to-value (LTV) covenants, but it’s just a function of valuations falling.”

But to some, the policy may prevent banks from originating more new loans. Like all lenders, banks recycle their cash: When loans get paid off, new loans are made with that capital. This FDIC policy, however, allows banks to tie up more of their capital into existing loans.

“Their cash is just sitting there. The previous deals aren’t coming through the system, so banks don’t have the money to re-lend back into the system,” says Mike Kelly, president and co-founder of Greenwood, Colo.-based Caldera Asset Management. “If you look out six months, it’s good for the current developers and banks. But beyond six months, it will be a net negative, because there will be no recycling of money.”

The IRS’ new regulation, announced in September, allows servicers to modify and restructure securitized loans before they slip into default, all without incurring severe tax penalties. In the past, the borrower could only negotiate a modification once the loan went into default and was transferred to a special servicer. But that was a catch-22: By waiting until default, it was already too late to really work anything out.

The rule doesn’t change how master servicers determine which loans can be modified, however. The contracts that exist between the servicer, issuer, and investor spell out what would trigger a workout, and those documents trump all.

“The servicing documents still rule, and baked into those agreements are very specific requirements as to what constitutes a loan that’s eligible for an extension or a workout,” says Brian Hanson, managing director of Washington, D.C.-based special servicer CWCapital Asset Management. “So, it’s not an automatic wave into special servicing any time a borrower says ‘I might have an issue.’”