Regulators Urge Fast Action by Lenders on Risky Loans

Wall Street Journal (02/01/08) P. A8; Paletta, Damian
Speaking at a meeting of the Florida Bankers Association, Comptroller of the Currency John Dugan says banks that underwrite commercial real estate loans should expect more scrutiny from the federal government in the coming months, as a report from the Federal Deposit Insurance Corp. (FDIC) reveals a nine-fold increase in write-offs of construction and development loans to $524 million in the 2007 third quarter from the same period in 2006. To safeguard against additional losses, Dugan expects lenders to seek new appraisals, hike loan-loss reserves, generate more capital and downgrade assets. Given that many commercial units typically are not owner-occupied, commercial real estate loans are deemed higher-risk than residential properties, as they are vulnerable to high vacancy and default rates when the economy slows. Meanwhile, FDIC Chairman Sheila Bair testified before the Senate Banking Committee that residential loan servicers need to do more to prevent widespread foreclosures when 1.7 million in nontraditional mortgages experience rate resets in 2009; she pointed out that the rate freeze plan orchestrated by the Bush administration and the mortgage industry does not help these borrowers.