Rescue Plan
Banks stalling loan deals until bailout money flows

Miami Daily Business Review March 11, 2009

by Polyana da Costa

The economy won’t be fixed until the banking system is fixed and the government will do whatever it takes to make that happen. 

That’s the mantra of reassurance from the Fed. But, as well-intentioned as it may be, the strategy is vague and the pronouncements have some unwelcome consequences, say some critics in South Florida.

Many banks are resisting selling their bad assets — both residential and commercial — at large discounts as they wait for a clear explanation of how much more financial help they will get from the government. That is one of the reasons there haven’t been more distressed deals — despite the growing line of bargain hunters. 

Peter Zalewski of Condo Vultures Realty of Bal Harbour, said many lending institutions have been in a holding pattern for months. 

“Institutions are sitting back waiting, simply trying to figure out what kind of a handout the federal government is going to offer to them,” he said. “No bank wants to cut a deal at 40 cents to the dollar if the next day, or the next week, they quickly realize that the federal government threw some sort of bailout that would have given them more money in return. So consequently, banks have come to a standstill.” 

The continuous talks and expectations of the Troubled Asset Relief Program (TARP), the Term Asset-Backed Securities Loan Facility (TALF), and the possibility of creating a Bad Asset Bank — a concept that lost steam in Congress but is now being considered under a similar program as a Public-Private Investment Fund (PPIF) — gives lenders, especially the large banks, hope that the government will help solve their problems, Zalewski said. 

“All [lenders] are doing right now is they are looking at their balance sheets and they are trying to figure out how they are going to go forward, but they are not going to react until the government’s program is really clear,” Zalewski said. 

Jeff Cannon, a former executive vice president at CNL Bank who recently started working as a consultant to lenders and developers, shares a similar view. 

While local banks are not expecting to get money from the stimulus plans, larger, regional and national banks are. 

And the way national banks decide to price their bad assets also will have an impact on local banks. 

He said many lenders want to see how effective TALF and TARP II will be in giving investors access to credit to acquire the lenders’ bad assets from their books. 

Adam Lubkin of IBIS Development Group, who is working with investors trying to buy discounted assets and loans from lenders, said he has been told by some regional banks that they are waiting for a more clear sign of what the government is going to do before they shed some of their assets at bigger discounts. 

“They flat out tell me that they don’t know exactly what is going on,” Lubkin said. “You’re seeing some of them getting rid of the stuff that nobody wants, but they are really not moving on the good stuff — good retail and office properties — and that is some of the frustration that you are seeing out there.” 

Most of the distressed deals that have closed so far, in cases where the lender accepted a big loss, were cash deals. And cash buyers want to buy assets at discounts the lenders can’t afford to give, Cannon said. 

Many banks would basically become insolvent if they decided to shed bad assets at steep discounts, said Adam Greenberg of BayBridge Real Estate. 

“I don’t know if they are necessarily waiting for the government, but there is definitely something bottle-necking the flush of assets,” Greenberg said. “The lenders have their price and if they don’t get that, there is some resistance.” 

Before simply writing off their assets, lenders want to know how much cash, if any, they will receive in order to determine how much of a loss they can take on assets. 

To Howard Ullman, an attorney and a mortgage modification counselor, lenders are so confident the government will solve their bad-asset problems that their efforts to modify loans to avoid foreclosure have lost steam.
It does sound contradictory to everything that is being talked about, and the expectation is a March 4 guidance issued by the Feds may change that, Ullman said. But so far, there has been no progress.
Under the new guidance, the Obama administration will pay lenders for modifying troubled mortgages and reducing a borrowers’ interest rate to as low as 2 percent. Lenders would have to reduce the mortgage payments to no more than 38 percent of the borrower’s monthly income. 

The Treasury Department also requires that institutions receiving financial assistance under the Financial Stability Plan established under the Troubled Assets Relief Program to implement loan modification programs. 

But will there be enough oversight to enforce the rule, wondered Ullman. 

“Everything I read says the banks are supposed to slow down the foreclosure process but we are not seeing that at all,” he said. “Since the government started talking about this Bad Bank, I’m seeing an acceleration in motions for summary judgments and I’m seeing lenders moving quickly for judicial sales.” 

Ullman said even when lenders are willing to work out a loan modification, deals they are offering homeowners are “ridiculous” and “not nearly enough.” 

In one case cited by Ullman, Countrywide Homes Loans offered to lower the interest on one homeowner’s mortgage from 8.35 percent to 7.12 percent. That would have reduced the payment by a little more than $100 from $2,047 to $1,910. 

“How much of a difference does that make?” he asked. “When the government is telling you to lower interests to 2 percent, why are you charging 7.1? This is not going to keep her in the home.” 

Lenders want to appear as if they have been working hard to modifying loans in order to qualify for bailout money, Ullman said. 

Ullman said Wachovia, which Wells Fargo acquired at the end of 2008, mailed out letters about a Mortgage Assistance Plan (MAP) to several of Ullman’s clients. The letters, which included an offer to reduce mortgage loans by 20 percent, did not help his clients, he said. 

“I called and they said this person doesn’t qualify for the program,” Ullman said. “So I asked why and they wouldn’t elaborate. They have the person’s information; why send out something if they don’t qualify?” 

According to Wells Fargo’s Debora Blume, “The goal of any modification is to achieve sustainable and affordable mortgage payments. We are working on a case-by-case basis with all at-risk customers to understand their financial situations to determine if we are able to help them. We notified customers who may be eligible and asked them to call us. Receiving a letter does not guarantee a loan modification.”


Adam Lubkin

The economy won’t be fixed until the banking system is fixed and the government will do whatever it takes to make that happen. 

That’s the mantra of reassurance from the Fed. But, as well-intentioned as it may be, the strategy is vague and the pronouncements have some unwelcome consequences, say some critics in South Florida. 
Many banks are resisting selling their bad assets — both residential and commercial — at large discounts as they wait for a clear explanation of how much more financial help they will get from the government. That is one of the reasons there haven’t been more distressed deals — despite the growing line of bargain hunters. 

Peter Zalewski of Condo Vultures Realty of Bal Harbour, said many lending institutions have been in a holding pattern for months. 

“Institutions are sitting back waiting, simply trying to figure out what kind of a handout the federal government is going to offer to them,” he said. “No bank wants to cut a deal at 40 cents to the dollar if the next day, or the next week, they quickly realize that the federal government threw some sort of bailout that would have given them more money in return. So consequently, banks have come to a standstill.” 

The continuous talks and expectations of the Troubled Asset Relief Program (TARP), the Term Asset-Backed Securities Loan Facility (TALF), and the possibility of creating a Bad Asset Bank — a concept that lost steam in Congress but is now being considered under a similar program as a Public-Private Investment Fund (PPIF) — gives lenders, especially the large banks, hope that the government will help solve their problems, Zalewski said. 

“All [lenders] are doing right now is they are looking at their balance sheets and they are trying to figure out how they are going to go forward, but they are not going to react until the government’s program is really clear,” Zalewski said. 

Jeff Cannon, a former executive vice president at CNL Bank who recently started working as a consultant to lenders and developers, shares a similar view. 

While local banks are not expecting to get money from the stimulus plans, larger, regional and national banks are. 

And the way national banks decide to price their bad assets also will have an impact on local banks. 

He said many lenders want to see how effective TALF and TARP II will be in giving investors access to credit to acquire the lenders’ bad assets from their books. 

Adam Lubkin of IBIS Development Group, who is working with investors trying to buy discounted assets and loans from lenders, said he has been told by some regional banks that they are waiting for a more clear sign of what the government is going to do before they shed some of their assets at bigger discounts. 

“They flat out tell me that they don’t know exactly what is going on,” Lubkin said. “You’re seeing some of them getting rid of the stuff that nobody wants, but they are really not moving on the good stuff — good retail and office properties — and that is some of the frustration that you are seeing out there.” 

Most of the distressed deals that have closed so far, in cases where the lender accepted a big loss, were cash deals. And cash buyers want to buy assets at discounts the lenders can’t afford to give, Cannon said. 

Many banks would basically become insolvent if they decided to shed bad assets at steep discounts, said Adam Greenberg of BayBridge Real Estate. 

“I don’t know if they are necessarily waiting for the government, but there is definitely something bottle-necking the flush of assets,” Greenberg said. “The lenders have their price and if they don’t get that, there is some resistance.” 

Before simply writing off their assets, lenders want to know how much cash, if any, they will receive in order to determine how much of a loss they can take on assets. 

To Howard Ullman, an attorney and a mortgage modification counselor, lenders are so confident the government will solve their bad-asset problems that their efforts to modify loans to avoid foreclosure have lost steam. It does sound contradictory to everything that is being talked about, and the expectation is a March 4 guidance issued by the Feds may change that, Ullman said. But so far, there has been no progress.Under the new guidance, the Obama administration will pay lenders for modifying troubled mortgages and reducing a borrowers’ interest rate to as low as 2 percent. Lenders would have to reduce the mortgage payments to no more than 38 percent of the borrower’s monthly income. 

The Treasury Department also requires that institutions receiving financial assistance under the Financial Stability Plan established under the Troubled Assets Relief Program to implement loan modification programs. 

But will there be enough oversight to enforce the rule, wondered Ullman. 

“Everything I read says the banks are supposed to slow down the foreclosure process but we are not seeing that at all,” he said. “Since the government started talking about this Bad Bank, I’m seeing an acceleration in motions for summary judgments and I’m seeing lenders moving quickly for judicial sales.” 

Ullman said even when lenders are willing to work out a loan modification, deals they are offering homeowners are “ridiculous” and “not nearly enough.” 

In one case cited by Ullman, Countrywide Homes Loans offered to lower the interest on one homeowner’s mortgage from 8.35 percent to 7.12 percent. That would have reduced the payment by a little more than $100 from $2,047 to $1,910. 

“How much of a difference does that make?” he asked. “When the government is telling you to lower interests to 2 percent, why are you charging 7.1? This is not going to keep her in the home.” 

Lenders want to appear as if they have been working hard to modifying loans in order to qualify for bailout money, Ullman said. 

Ullman said Wachovia, which Wells Fargo acquired at the end of 2008, mailed out letters about a Mortgage Assistance Plan (MAP) to several of Ullman’s clients. The letters, which included an offer to reduce mortgage loans by 20 percent, did not help his clients, he said. 

“I called and they said this person doesn’t qualify for the program,” Ullman said. “So I asked why and they wouldn’t elaborate. They have the person’s information; why send out something if they don’t qualify?” 

According to Wells Fargo’s Debora Blume, “The goal of any modification is to achieve sustainable and affordable mortgage payments. We are working on a case-by-case basis with all at-risk customers to understand their financial situations to determine if we are able to help them. We notified customers who may be eligible and asked them to call us. Receiving a letter does not guarantee a loan modification.”