Good News/Bad News:Return to the 80s?
Karen Neeley, of Counsel,
Cox Smith Matthews Inc.
Austin, Texas
www.coxsmith.com
Here’s a sampling of recent headlines: “FDIC Seeks to Add Bankruptcy Pros as Bank Failures Loom” [Dow Jones & Company, 2/28/2008], ”Small and Midsize U.S. Banks Beginning to Struggle in Credit Crisis” [New York Times, 2/27/2008].
Meanwhile, Congress is debating a bankruptcy bill that would allow judges to re-write home loan terms, and the Fed is proposing amendments to HOEPA that would require escrows on “higher cost” mortgage loans. Foreclosure rates are up (except where they are down!). So, are we poised on the precipice again?
Well, maybe. The FDIC’s year end data on Southwest commercial banks shows little change over the last three years with net charge-offs to loans and leases at 0.22% and noncurrent loans and leases to total loans and leases at 0.73%. Still, some Southwest banks are slipping downward to 3-rated with some in the dread 4-rated category. Many institutions in the state have little exposure to mortgage security slippage. However, to the extent the economy of the nation is moving toward recession, everyone must be alert.
So, what does this mean to banks? Here are some thoughts for the proactive!
Be sure that you have good procedures in place for those relationships that wind up in bankruptcy. Do not violate the automatic stay by continuing collection efforts. However, do evaluate actions to protect—or reach—your collateral.
For every company that is in bankruptcy reorganization, there is an opportunity to assist with post-bankruptcy finance. Alternatively, there are acquisition-minded businesses that may be prepared to step in and buy up assets. Again, this presents an opportunity to the lender with good underwriting standards in place.
If your institution has troubled loans, consider beefing up your work-out area. Passivity is the wrong response here! Be prepared to refinance in a responsible manner to convert a problem asset into a performing one. Consider the differences between “modifying” existing loan terms versus a “refinancing.” There are both legal and practical consequences to your selection. For example, with regard to personal property collateral, you need to be aware of the significance of a purchase money position with regard to new creditors who may come in to finance new inventory. With regard to real property, there can be a difference in the title insurance cost.
All of the federal banking regulators have issued press releases regarding the importance of working with residential real estate borrowers. Mortgage servicers (including banks that retain their loans in portfolio) should report their loan modification and foreclosure prevention efforts through the HOPE NOW Alliance. There is also a State Foreclosure Prevention Working Group, which issued its first data report February 2008. In the mortgage area, one of the most significant ways to convert troubled borrowers to performing ones is to move them out of adjustable rate mortgages into fixed rate ones. More lenders and servicers are working toward long term refinancing fixed rather than just temporary band-aids for arrearages.
Examiners who have been your “friends” in the past may have had an attitude adjustment. Be prepared to respond to examination issues, including response to MOUs and cease and desist orders. When the exam team comes to your bank, be sure that your internal loan watch list is complete, current, and accurate. It should identify all of your problem loans, quantify the loss/risk, and track your efforts with the borrowers.
Finally, be sure that you have good communications efforts in place. Your board of directors must get accurate, timely reports. Your local community should be aware of your efforts and the stability of the local economy. Generalized news stories about the nation as a whole may not reflect the situation for your shareholders and your customers. This is a great opportunity to promote financial literacy—both in the schools and among your customers.
So, lemons or lemonade? Don’t let someone else decide that for you!
About the author: Karen M. Neeley has been a bank lawyer for 32 years. She is “of Counsel” with the law firm of Cox Smith Matthews Incorporated in the Financial Institutions Group and serves as general counsel for the Independent Bankers Association of Texas.
