By Jonathan Stempel - Analysis
NEW YORK (Reuters) - The end of the decline in real estate is nowhere near, and yet U.S. banks may feel it shrewd to hold onto troubled loans in the sector rather than sell them or take losses.
"Many of them are remembering that the 'sit on the loan, wait it out, work it out' strategy did pay off for those with the capability and patience to do that back in the early '90s," according to Jacques Gordon, global strategist at LaSalle Investment Management.
Industry experts who spoke at the Reuters Global Real Estate Summit this week were wary about the outlook for banks.
They projected that the commercial real estate downturn is nowhere near bottoming, while demand for home purchases may stay sober until the economy is more clearly in recovery mode and consumer credit conditions improve.
Commercial banks "are going to have to see a few better indicators before the balance of funds begins to flow a little bit," said Richard Dugas, chief executive of Pulte Homes Inc (PHM.N: Quote, Profile, Research, Stock Buzz), which will become the nation's largest homebuilder when it finishes buying Centex Corp (CTX.N: Quote, Profile, Research, Stock Buzz). "They've simply taken huge hits on their portfolio, and they're not done yet."
That may dissuade banks from making more loans, regardless of whether they plan to keep them or sell them to investors, further dampening activity and economic recovery prospects.
Lender caution "wasn't just a byproduct of real estate activity gone amok, but was a byproduct of the financial system going way overboard," said Allen Smith, chief executive of Prudential Real Estate Advisors. "Real estate was one piece."
REAL PROPERTY, UNREAL PRICES
Commercial property prices have plummeted as sellers essentially capitulate to a lingering recession and still-tight credit. Moody's Investors Service this week said prices in April were down 29.5 percent over the prior year-and-a-half.
Barclays Capital analyst Jason Goldberg this month said commercial real estate "will bear the brunt of future deterioration among the various loan categories" for banks.
He said BB&T Corp (BBT.N: Quote, Profile, Research, Stock Buzz), Comerica Inc (CMA.N: Quote, Profile, Research, Stock Buzz), Marshall & Ilsley Corp (MI.N: Quote, Profile, Research, Stock Buzz), M&T Bank Corp (MTB.N: Quote, Profile, Research, Stock Buzz), Regions Financial Corp (RF.N: Quote, Profile, Research, Stock Buzz) and Zions Bancorp (ZION.O: Quote, Profile, Research, Stock Buzz) are among lenders with more than one-third of their loan portfolios in commercial real estate or construction loans.
"Construction loans are an absolute disaster," said Richard Parkus, head of commercial mortgage-backed securities research at Deutsche Bank Securities Inc.
It is nonetheless difficult to paint heavily exposed banks with a broad brush. BB&T, for example, this month repaid $3.1 billion of federal bailout money it took last year, while many analysts believe Regions may struggle to repay its $3.5 billion without further diluting shareholders' stakes or selling key assets.
Residential real estate is not out of the woods either. Prices of U.S. single-family homes fell 19.1 percent in the first quarter, according to the S&P Case-Shiller Home Price Indices. Economists on average expect April data scheduled for release on Tuesday to show an 18.9 percent drop.
TOO SHY Continued...
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