Friday, July 31, 2009

CMBS Delinquency Jumps 53% in June

CRE Weekly: CMBS News

Friday, July 31, 2009 Vol. 4 Issue 31

The volume of delinquent CMBS loans skyrocketed by 53 percent in June to $28.65 billion. That increase includes a $9.87 billion jump, to $11.24 billion, in the volume of loans that became at least 30-days late in June, the biggest-ever monthly increase. It could be explained in large part by the classification as 30-days late of some $3.4 billion of loans on properties owned by General Growth Properties, which filed for bankruptcy in April.

Take out the GGP loans and the overall delinquency rate is still a whopping $25.27 billion. As a result of the Chicago REIT’s bankruptcy, it is making only interest payments on its mortgages, even if they also require principal payments. While some servicers have classified loans they’re handling as delinquent as a result of the missing principal payments, others have classified them as performing. That could indicate that they’re either advancing principal payments or they’re accounting for the loans differently.

Even if you exclude the GGP loans, the delinquency rate has jumped to never-before-seen levels. That’s the result of the continued freeze in the credit markets, where few maturing mortgages are able to refinance, and declining property fundamentals that have stymied the ability of some properties to stay current on their indebtedness.

Realpoint now expects the delinquency rate to breach the 6 percent level before the end of the year.
That’s to be expected given the continued increase in the volume of securitized loans that are now in special servicing. As of the end of June, 5.54 percent of all CMBS loans were in special servicing.
The delinquency rate could jump even higher soon after this year ends as some very large loans exhaust their interest reserves and property cash flows are insufficient to fully service their debt.

The best known such loan is the $3 billion of securitized debt on the Stuyvesant Town/Peter Cooper Village apartment complex in Manhattan. The debt is scattered among five CMBS transactions and reserves tied to it are expected to run out early next year.

Every delinquency category save the 60-day bucket saw an increase in volume during the month. The 90-day bucket jumped in size by 38 percent to $9.57 billion from $6.94 billion.

FDIC Sells $1.2Bln of Commercial Mortgages

CRE Weekly: Mortgage News

Friday, July 31, 2009 Vol. 4 Issue 31

The FDIC sold $1.2 billion of commercial mortgages in 171 transactions during the second quarter, recovering $650 million, or nearly 55 percent of the loans’ principal balance.

Since instituting its whole-loan sales program late last year, the agency has recovered 48.4 cents on the dollar for loans with a balance of $2.7 billion. It has sold those loans to a total of 147
investors in 417 transactions.

During the latest quarter, according to FDIC data compiled by Commercial Real Estate Direct, the agency recovered $507.6 million, or 61.3 percent of principal balance for performing loans.

It recovered $91.8 million from the $213.4 million of loans that it had classified as nonperformers. And mixed-quality or subperforming loans sold for a total of $50.5 million, or 34.5 percent of balance. A total of 66 investors bought loans through the agency’s whole-loan sales program. As should be expected, a handful of investors have been dominant buyers.

During the second quarter, Beal Bank, which was a very active buyer of distressed loans during the RTC era, was by far the most-active investor, paying $206.16 million, or 61.14 percent of the balance for 774 loans in 49 transactions. The bulk of its acquisitions involved loans from the failed Franklin Bank, a Houston institution that was seized last November.

Colony Capital, meanwhile, was second-most active among investors during the second quarter. It acquired 212 loans, with a principal balance of $178.96 million, through 23 transactions. All were from Bank of Clark County of Vancouver, Wash., and Haven Trust Bank of Duluth, Ga.

The agency’s whole-loan sales program, overseen by its Dallas regional office, relies on auctions conducted through DebtX of Boston and First Financial Network of Oklahoma City. The agency recently tapped three additional whole-loan sales advisers - Eastdil Secured, Garnet Capital Advisors and Mission Capital Advisors - but the thinking is that the agency is looking to sell all commercial mortgages it takes from failed banks through structured offerings, where it would keep a stake, while offering financing. Whole-loan sales are all-cash deals, with no profit-sharing involved.

The move to structured offerings, which would involve portfolios of roughly $1 billion apiece, has received largely negative reviews from countless investors and advisers, who feel the offerings would alienate most of them. The bulk of the investors who have successfully acquired whole loans from the agency have invested less than $10 million each. Many of those would essentially be excluded from the structured offerings, not only because they would require substantially greater equity commitments, but because the portfolios could involve hundreds of loans each - a servicing requirement that most investors couldn’t meet.

Meanwhile, some large investors that would otherwise be able to pony up say $100 million or more for a large portfolio are said to also have panned the agency’s plans.

For starters, they’re leery of getting involved in a partnership with the government, which likely would involve onerous reporting requirements and possibly entail restrictions on profits and compensation.

In addition, many of those large investors have put together substantial kitties of capital. The structured offerings might, ironically, hamper their ability to put much of that capital to work.

FDIC: Legacy Loans Program – Test of Funding Mechanism

The FDIC is taking the next step in the development of the Legacy Loans Program (LLP). The LLP is part of the Public-Private Investment Program announced in March by the Secretary of the Treasury, the Federal Reserve, and the FDIC, and was designed to help banks remove troubled loans and other assets from their balance sheets so that banks could raise new capital and be better-positioned to provide lending to further the recovery of the U.S. economy.

In June, the FDIC indicated that it would continue to develop this program by testing the LLP's funding mechanism through the sale of receivership assets. This step will allow the FDIC to be ready to offer the LLP to open banks as needed.

The first test using the LLP funding mechanism commenced this week. In the transaction to be offered, the receivership will transfer a portfolio of residential mortgage loans on a servicing released basis to a limited liability company (LLC) in exchange for an ownership interest in the LLC. The LLC also will sell an equity interest to an accredited investor, who will be responsible for managing the portfolio of mortgage loans. Loan servicing must conform to either the Home Affordable Modification Program (HAMP) guidelines or FDIC's loan modification program.

Accredited investors will be offered an equity interest in the LLC under two different options. The first option is on an all cash basis, which is how the FDIC has recently sold receivership assets, with an equity split of 80 percent (FDIC) and 20 percent (accredited investor). The second option is a sale with leverage, under which the equity split will be 50 percent (FDIC) and 50 percent (accredited investor).

The funding mechanism is financing offered by the receivership to the LLC using an amortizing note that is guaranteed by the FDIC. Financing will be offered with leverage of either 4-to-1 or 6-to-1, depending upon certain elections made in the bid submitted by the private investor. If the bid incorporates the 6-to-1 leverage alternative, then performance of the underlying assets will be subject to certain performance thresholds including delinquency status, loss severities, and principal repayments. If any one of the performance thresholds is triggered over the life of the note, then all of the principal cash flows that would have been distributed to the equity investors would be applied instead to the reduction of the note until the balance is zero. The performance thresholds will not apply if the bid is based on the lower leverage option.

The FDIC will be protected against losses on the note guarantee by the limits on the amount of leverage (both in terms of a maximum ratio and dollar amount), the mortgage loans collateralizing the guarantee, and the guarantee fee. The FDIC will analyze the results of this sale to see how the LLP can best further the removal of troubled assets from bank balance sheets, and in turn spur lending to further support the credit needs of the economy.

Thursday, July 30, 2009

FDIC Poised to Split Banks to Lure Buyers

By ROBIN SIDEL, Wall Street Journal

The Federal Deposit Insurance Corp., grappling with the worst banking crisis since the 1990s, is poised to start breaking failed financial institutions into good and bad pieces in an effort to drum up more interest from prospective buyers.

The strategy, which is likely to begin soon, is aimed at selling the most distressed hunks of failed banks to private-equity firms and other types of investors who may be more willing than traditional banks to take a flier on bad assets. The traditional banks could then bid on the deposits, branches and other bits of the failed institution that are appealing.

"We want banks to participate in the resolution process, but we know it's a tough time for banks to participate in the resolution process," said Joseph Jiampietro, a senior adviser to FDIC Chairman Sheila Bair. He made the comments Wednesday during a presentation to a community-banking conference in New York sponsored by Keefe, Bruyette & Woods Inc., a boutique investment firm that specializes in financial services.

Regulators have seized 64 banks this year as the credit crisis continues to wreak havoc on small institutions that have been hit hard by the collapse in housing prices and deteriorating commercial real estate. Although the banks are technically seized by other regulators, it is the FDIC's job to dispose of the assets in a cost-effective manner.

The FDIC has found buyers for most of the failed institutions, but many prospective bidders are leery of taking on bad loans from a shuttered bank. That remains the case despite the FDIC's efforts to encourage bidders by providing loss-sharing agreements in about 40 of this year's bank failures.

Just last week, State Bank & Trust Co. of Pinehurst, Ga., entered into a loss-share transaction with the FDIC on about $1.7 billion of assets of Security Bank Corp., which owned six banks in Georgia that had a combined $2.8 billion in assets.

But those types of deals aren't providing enough comfort to the FDIC, which wants to see a more-vibrant auction process.

"There are certain situations when assets are so distressed and make up a significant percentage of the balance sheet that strategic buyers are hesitant to participate in the process," said Mr. Jiampietro.

Details of the FDIC's latest effort to generate more bidding interest still are being worked out, but "we hope this will have greater appeal to strategic buyers," said James Wigand, deputy director of the FDIC's division of resolutions and receiverships, who also spoke at the conference.

The agency is considering several structures, including transferring the bad assets to a new entity established by the FDIC that will then be sold off. Another option, the FDIC officials said, is to allow traditional bidders to team up with buyers for the distressed assets.

Mr. Jiampietro said the FDIC is "pretty far along" in determining the best structure to entice bidders, and such a transaction could take place in the coming weeks.

Sanford Brown, a banking-industry lawyer at Bracewell & Giuliani LLP in Dallas, said the new structure may give comfort to banks that like a failed bank's deposits and real estate, but are leery of taking on its loans.

"There are relatively few bidders in a lot of these situations, and in some cases there is only one bidder," he said.

The strategy could provide an opportunity for private-equity firms that complain they are being hamstrung in their efforts to buy failed banks. This month, the FDIC proposed guidelines for private-equity investors that could make it more difficult for them to compete against traditional banks for failed institutions.

Among other things, private-equity investors would be required to hold higher capital reserves than traditional banks. Although the proposals are aimed at deterring private-equity investors from buying and flipping failed banks, the firms contend that they would create an uneven playing field between private equity and traditional banks.

Write to Robin Sidel at

Wednesday, July 29, 2009

S.F. tower's owners will forfeit it to lender

Tuesday, July 28, 2009

James Temple, Chronicle Staff Writer

The 42-story office tower is at 333 Bush St. in San Francisco

The owners of a premier San Francisco office tower plan to forfeit the property to their lenders, the city's second distressed transaction involving a major commercial building in recent weeks and another sign of the growing pressures in the sector.

Hines and Sterling American Property decided to transfer their interest in 333 Bush St. to the original financers, following the surprise dissolution of law firm Heller Ehrman in September, according to a letter Hines sent to local real estate brokers and obtained by The Chronicle. The 118-year-old law firm defaulted on its 250,000-square-foot lease, leaving the nearly 550,000-square-foot property 65 percent vacant.

Industry watchers have been openly speculating the building would fall into default in the months since. Hines and Sterling bought the tower for $281 million in 2007, near the top of the market, when it was 75 percent leased.

The partnership is handing the property to Brookfield Real Estate Finance and Munich Hypo Bank for the amount of the outstanding loan, the letter said.

"We diligently worked with the lender, but were not able to come to a mutually satisfactory restructure of the existing debt," it said.

Hines spokeswoman Kim Jagger declined to address the talks or letter, saying via an e-mail: "As a matter of policy, we don't comment on ongoing lender discussions."

The letter said that Hines is "financially sound and well positioned," but the Houston real estate investment company has defaulted on two other Bay Area properties in recent months. Those include the three buildings at the 1.2 million-square-foot Watergate Office Towers in Emeryville that it held in a joint venture with CalPERS, as well as the nearly 500,000-square-foot Marin Commons office property in San Rafael.

Earlier this month, The Chronicle reported an undisclosed private equity fund bought the $40.8 million note on 250 Montgomery St., about half of its face value, after owner Lincoln Property Co. fell into default on the loan. Less than two weeks later, it emerged that the Four Seasons Hotel on Market Street defaulted on a $90 million loan. A handful of other small office buildings, hotels and multifamily properties in San Francisco also have gone into default in recent months.

More distressed deals are expected. Nearly three-quarters of Class A office buildings downtown sold between 2005 and 2007, a bonanza that drove up prices to all-time highs and squeezed the ratio of rental income to cost to record lows. But the economic collapse sharply reduced rent and occupancy levels, making it increasingly difficult for landlords to meet their debt obligations.

"San Francisco will have a whole new slate of players within three years," said David Klein, senior vice president with San Francisco brokerage NAI BT Commercial.

E-mail James Temple at

Tuesday, July 28, 2009

A Debate Rages in Iceland: Independence vs. I.M.F. Cash

July 28, 2009

By LANDON THOMAS Jr., New York Times

REYKJAVIK, Iceland — Just months after an epic banking collapse forced Iceland into the arms of the International Monetary Fund, this island nation is locked in a fierce debate over how to pay off its creditors without ceding too much of its vaunted independence.

The balance Iceland strikes between bowing to the policy demands of the global financial community and satisfying the desires of its increasingly resentful population of 300,000 will be closely watched as I.M.F. programs in beaten-down economies from Latvia and Ukraine to Hungary and Romania enter a crucial phase.

”When you impose austerity, it becomes very painful and comes at a cost,” said Simon Johnson, a former I.M.F. economist who now teaches at the Massachusetts Institute of Technology. But many Icelanders are blaming the I.M.F. and in this case, he says, that is not warranted.

“Iceland is a rich country that behaved recklessly and helped destabilize the world financial system,” Mr. Johnson said. “They will have to take their medicine.”

While those in Iceland’s left-leaning government will not put it so bluntly, that is broadly the case they are making.

The first country to throw its government out of office as a result of the global financial crisis, Icelanders could see the government that replaced it topple too, leaving the country rudderless — unless it wins approval for a deal to repay Britain and the Netherlands the $5.7 billion loan it used to compensate foreign depositors for losses in Icelandic banks.

A vote on the measure in the country’s Parliament is scheduled for next week. But even Iceland’s own government is riven.

“This is an attack on our sovereignty,” said Ogmundur Jonasson, the country’s health minister. “It reminds me of old colonial times. Gordon Brown had no harsh words for the United States when Lehman Brothers went down and billions of pounds went to the U.S. That was friendship — this is ‘Take the little guy and nail him to the wall.’ ” To not pass the bill, the government says (most of it anyway), would lead to the I.M.F. and other outside lenders withdrawing funds, further jeopardizing the country’s fragile condition.

But detractors say passing it would increase Iceland’s debt burden to 200 percent of gross domestic product, making it one of the most leveraged nations in the world. Ultimately, they say, it could drive Iceland to default.

At the crux of this debate is the Icesave, or “Iceslave,” as it is called here. Icesave accounts were a top-of-the-market gambit by Landsbanki, the most aggressive of the failed Icelandic banks, to raise cash by extending its branch network from tiny Reykjavik to the high streets of London. The reaction to the agreement to make good on the accounts encapsulates all the swelling anger that Icelanders now bear toward bankers, foreign creditors and I.M.F. technocrats — not necessarily in that order.

Lilja Mosesdottir is an economist and a back-bench member of Parliament in the governing Left Green party. But if she were to vote now, she says, she would vote against the government bill. Ms. Mosesdottir, new to politics, swept into power this winter when the conservative party was overturned by the “pots and pans revolution.”

“It is like after a war and you are the loser,” she said, taking a quick coffee break from back-room negotiations over the deal. “This is an agreement that will lead to a sovereign default, and we don’t want that to happen.”

Whether or not she is right about default, the war analogy is apt. Iceland has lost billions, and others are now dictating the terms of its recovery.

The resentment felt here is rooted in a belief that Iceland’s core virtue of flinty self-reliance has been defiled by its bankers and foreign creditors. It is a sentiment that stretches far into the country’s history and culture — from the Nordic sagas to the quest for autonomy of Bjartur of Summerhouses, the impoverished sheep farmer in Halldor Laxness’s “Independent People,” the country’s best-known modern literary work.

As the rhetoric escalates, Iceland’s finance minister, Steingrimur J. Sigfusson, a lifelong leftist, finds himself in the awkward position of defending the Icesave plan as well as the severe economic restrictions that the country has been forced to endure to qualify for more money from the I.M.F. and other Nordic lenders. Such measures include sharp cuts in health spending and higher gas prices. Higher interest rates have pushed unemployment to about 8 percent, from 1 percent, in little more than a year.

Mr. Sigfusson scoffs at any notion of default and argues that the deal to repay creditors was the best that could have been achieved. With a term of 15 years, a low interest rate and a seven-year grace period, the deal is flexible enough to allow Iceland to repay it, he says, especially if the economy recovers and the government is successful in selling Landsbanki’s foreign assets.

“This is the greatest tragedy of all, but it has to be done,” he said, looking gaunt from the hours of parliamentary arm-twisting that now consume his days.

As to the widely held belief that it is the I.M.F. and not the government that is dictating policy, Mr. Sigfusson acknowledges that he is in close contact with the I.M.F.’s representative here.

He points to frequent disagreements, especially over the fund’s recommendation that the government maintain high interest rates as well as capital controls — a prescription he describes as similar to wearing a belt and suspenders at the same time. But he emphasizes that it is Iceland, not the I.M.F., that has the final word.

“This is a trial not just for us, but the I.M.F., too,” he said. “They have a lot at stake here as they must show that they are flexible enough to adapt their program to a developed Nordic welfare state.”

Known to many here as “the governor of Iceland,” Franek Rozwadowski, the I.M.F. representative, argues that this designation is inaccurate. As part of its program, Iceland must turn a deficit that is now 13 percent of G.D.P. to a surplus by 2013.

“It would be more accurate to call the relationship a collaboration in which Iceland has engaged the fund to help design its recovery program,” he said.

On Aug. 3, the I.M.F. is expected to discuss whether to disburse a second tranche of its $2.1 billion loan to Iceland (about a quarter has been disbursed so far). Mr. Rozwadowski says Iceland is on target with steps to balance its budget, and he hails Mr. Sigfusson for political courage.

Such niceties are thin gruel for many Icelanders whose personal debts have skyrocketed in the wake of the precipitous fall in Iceland’s currency, the krona.

Gunnar Sigurdsson, a theater director, says his car loan — which was tied to a basket of Swiss francs and Japanese yen — has doubled since the crisis began; his mortgage payments have jumped over 35 percent.

Personal bankruptcy is inevitable, he says, and he is now trying to make a “Roger and Me”-type documentary — training his camera on Iceland’s top politicians, bankers and, if he is lucky, Dominique Strauss-Kahn, the head of the I.M.F. “I have had enough of this stupidity,” he said. “I just want answers.”

Thursday, July 23, 2009

First Washington Realty, CalPERS buy back portfolio

Wednesday, July 22, 2009, 12:26pm PDT

Sacramento Business Journal

First Washington Realty Inc. and the California Public Employees’ Retirement System have signed a deal to purchase a 60 percent interest in 86 shopping centers valued at $1.73 billion from Australia’s Macquarie CountryWide Trust.

The 11.5 million-square-foot portfolio, which spans 17 states includes 16 properties in the San Francisco, Los Angeles and San Diego areas.

In 2005, Regency Centers, through a joint venture with Macquarie CountryWide Trust, paid $2.74 billion for more than 100 strip centers across the U.S. from a joint venture of First Washington and Sacramento-based CalPERS, the nation's largest pension fund.

In 2001 CalPERS had bought the portfolio from Bethesda, Md.-based First Washington Realty Trust, which kept managing the properties for CalPERS until it traded them to Regency and Macquarie.

Jacksonville, Fla.-based Regency (NYSE: REG) will keep managing the properties and First Washington will provide asset management, buying back debt that Macquarie took on.

Considering the portfolio traded for $2.74 billion in 2005 (with about 15 of those properties unloaded since) and is currently valued at $1.73 billion, the venture bought it back at a major discount. Another sign of that this is a good deal is that the cash flow, or the net operating income generated by the portfolio, remains unchanged.

Regency has an option to increase its current interest in the portfolio from 25 percent to 40 percent. The transaction is expected to close by the end of July.

“We are pleased with the opportunity to once again own this pre-eminent national portfolio of neighborhood and community shopping centers,” William Wolfe, president of First Washington, said in a statement. “It is a portfolio we know well and one which we believe offers the opportunity for highly attractive growth and returns over time.”

Tuesday, July 21, 2009

St. Regis Monarch Beach seized by Citigroup

The resort, which will continue to operate under its current name, is an indicator of the troubles in the high-end hotel market.

By Roger Vincent and E. Scott Reckard, Los Angeles Times

July 21, 2009

The seizure of the St. Regis Monarch Beach, where American International Group Inc. sponsored a luxury retreat just days after accepting a federal bailout, is the most dramatic sign yet of the deep troubles in the market for high-end hotels.

Citigroup Inc. took over the Dana Point hotel and golf course Monday after months of negotiations over a $70-million loan that was in default. A foreclosure auction slated for today was canceled after the lender realized there would be no serious bids for the property, according to a knowledgeable person who was not authorized to discuss the situation publicly and spoke on condition of anonymity.

The takeover comes at a time of severe contraction in the hospitality industry.

Resorts such as the St. Regis, which cater to wealthy travelers and the high-end corporate retreat business, are experiencing some of the steepest declines in revenue as the recession hammers demand for business and leisure travel.

As twilight fell one night last week, a single person lounged by the resort's main pool while only a few couples sat in the restaurants and a piano player performed for an empty lounge. A person knowledgeable about the resort and the negotiations with Citigroup said that only about 15% of the hotel's rooms had been rented this summer.

Such low occupancy made it impossible for the resort to meet its all its debt obligations, which included payments on a $230-million first mortgage and the $70-million loan held by Citigroup, analysts said. With property values down in the recession, the resort complex was probably not worth much more than $100 million, said Alan Reay, a consultant with Atlas Hospitality Group.

The hotel's place in an infamous recession-related scandal has made its problems worse, investment banker Donald Wise of Johnson Capital said.

The taint arrived by association with AIG, the giant New York insurer that, because of massive wrong-way bets on the mortgage markets, became the largest recipient of bailout money from the federal government.

Just weeks after receiving its first $85 billion in federal funds, AIG shelled out more than $440,000 at the St. Regis for rooms, wining and dining, spa treatments and rounds of golf to reward 100 top salespeople.

"The property has already been nearly catastrophically damaged, through no fault of its own or the previous ownership, by the unwanted media exposure going back to when AIG held their conference," Wise said. "It's a wonderful asset in nearly catastrophic straits."

The hotel depends heavily on corporate get-togethers such as AIG's, which were expected to bring in about 70% of St. Regis' business, Wise said. After AIG's junket received widespread censure from lawmakers and pundits, business at the St. Regis plummeted.

"They became the poster child of greed and avarice and got slimed in many ways," Wise said. "It wasn't the property. They just happened to book a meeting, and the rest is history."

The hotel's location on the inland side of Pacific Coast Highway -- away from direct beach access -- is also a competitive disadvantage, industry observers said.

Becoming the owner of the resort will be expensive for Citigroup, which now will not only have to pay interest on the $230-million first mortgage, but also cover St. Regis' operating losses.

Citigroup will continue to seek buyers for the resort while operating it as a St. Regis under a contract with Starwood Hotels & Resorts Worldwide Inc., which owns the St. Regis brand. It will have to continue making payments on the $230-million loan, which is held by a hedge fund and Prudential Financial Inc. and will come due in a balloon payment in 2012.

The lender's decision to take over the resort, analysts said, was most likely made reluctantly.

"I don't think any of these lenders today wants the property on their books," consultant Reay said. "They can't get any money out of this deal."

Citigroup might have to operate the resort for five or 10 years before it would be able to sell it and make some profit, Reay said.

The Makarechian development family of Newport Beach, which does business as Makar Properties, built the hotel and will continue to own adjacent land targeted for high-end residential development, a spokesman said.

"We are happy to say that Makar and Citi were able to reach an agreement that resulted in our continuing to own significant portions of the overall resort, while at the same time allowing for the public sale to be canceled," the family said in a statement.

In refinancing the property in 2007 for a total of $300 million between the two loans, the family and its partner, Farallon Capital Management, had already cashed out their equity stakes.

As to what the new owners should do to try to boost revenue, investment banker Wise suggests the hotel work on amplifying its appeal to locals. The hotel, he said, might benefit if it were turned into a kind of country club for Orange County residents.

"They could create more places for weddings," he said, "and create a bona fide kosher kitchen for bar mitzvahs."

Monday, July 20, 2009

FDIC takes over Vineyard Bank and Temecula Valley Bank

July 19, 2009

Two failed Southern California banks will reopen Monday under new owners, after the Federal Deposit Insurance Corp. took control of them late Friday.

Vineyard Bank of Corona, which has 16 branches, was sold to California Bank & Trust of San Diego, the FDIC said.

Separately, Temecula Valley Bank of Temecula and its 11 branches were sold to First Citizens Bank and Trust of Raleigh, N.C.

Both Vineyard and Temecula Valley have been careening toward collapse for the last year amid huge losses on real estate-related loans.

FDICshield Vineyard had assets of $1.9 billion as of March 31, the FDIC said. Temecula Valley’s assets were $1.5 billion as of May 31.

The official FDIC announcements are here for Vineyard and here for Temecula Valley.

All deposits of the two banks, except those brought in by brokers, will be transferred to the acquiring banks. As often occurs in small-bank failures, the FDIC will pay off the brokered deposits, which tend to be hot money that was looking for above-average yields on savings certificates.

California Bank & Trust, which has about $10 billion in assets and 93 offices in California, is a unit of Zions Bancorp. of Utah.

First Citizens, with $17.2 billion in assets, operates 354 branches mostly in the Southeast. But it also has a toehold in California via its IronStone Bank unit, which has nine offices in the state, mainly in San Diego and Orange counties.

The FDIC said it entered into loss-sharing agreements with the acquiring banks to deal with the rotten assets of Vineyard and Temecula Valley. The FDIC will share losses with California Bank & Trust on $1.5 billion of Vineyard’s assets. The agency will share losses with First Citizens Bank on $1.3 billion of Temecula Valley’s assets.

Even so, the FDIC estimated that the failures would cost its insurance fund nearly $1 billion in total -- $579 million for Vineyard and $391 million for Temecula Valley.

The demise of Vineyard and Temecula Valley brings the total number of failed U.S. banks this year to 57, including eight in California.

-- Tom Petruno, Los Angeles Times

Wednesday, July 15, 2009

CREFA Market Commentary

The FDIC bank takeovers are actually not as opaque as we originally thought. The FDIC has actually posted the purchase and sale agreement on FDIC website, very detailed and transparent. We took a quick look at BankUnited's deal. As an example, the loss sharing agreement on BankUnited residential mortgages of about $10B covers $4B in losses, or a 40% loss rate. It looks like the price was determined based on this big loss factor which is covered 80/20 by the FDIC and 95/5 after the $4B threshold. For this reason, we doubt BankUnited will be the last FDIC bank Private Equity bids on.

We saw an article in the WSJ this week about Private Equity pushing back on the stricter rules around PE ownership of Banks. We think it is a good idea to continue to shed some light on the Bank transactions and where they are going. Private Equity did not like higher capital and longer holding period requirements. Private Equity obviously, wants to trade and trade quickly with a maximum amount of leverage.

Private Equity and other groups are circling Corus Bank to buy the Bank’s condo loans or the whole institution. Corus has been on the precipice for a few years. Some of these investors are waiting for the Fed to declare the bank dead, at which time the best deal may be made with the FDIC.

PPIP press coverage appears to be waning and it is almost like the public has moved on and is bored with the PPIP whole loan program since the program has apparently fizzled.

The Government is not sure how transparent the PPIP securities trades would be because these might (we are speculating) indicate true securities values and perhaps necessitate bank write downs. Institutions are trying to minimize downward pressure on securities prices.

Wells Fargo recently sold privately $600 million in mostly non-performing subprime loans to Irvine, Calif.-based Arch Bay Capital for 35 cents on the dollar, about twice the price hedge funds were offering.

Friday, July 10, 2009

What's killing banks on Main Street?

Bad loans are only one part of the problem; disastrous investments and risky funding sources have also helped to bring about the latest batch of bank failures.

By David Ellis, staff writer
July 10, 2009: 12:25 PM ET

NEW YORK ( -- On just about every Friday afternoon, bank regulators announce the latest batch of bank failures...they've shuttered 52 so far this year and the pace could well pick up.

Behind these causalities is a dangerous mix of risky funding techniques and loans to local businesses that simply went bad.

Most of the banks that have failed so far this year were ultimately done in by the large number of loans they issued to local residential and commercial real estate developers, who in turn were hit by the flagging economy.

For example, when Nevada's Silver State Bank failed last September approximately two-thirds of its entire loan portfolio consisted of real estate development and commercial construction loans.

Other banks simply succumbed to broader economic factors that were beyond their control. When milk prices suffered a steep decline earlier this year, many Colorado dairy producers found themselves unable to make good on their loan obligations, which only further squeezed ailing lender New Frontier. Regulators closed the Greeley, Colo.-based bank in April.

And with the commercial real estate market and small business sectors still struggling, some experts worry that the lenders that service them will be hit particularly hard in the months ahead.

"We are seeing more stress on the commercial real estate side than at the end of last year," said Karen Dorway, president and director of research at the bank rating and research firm Bauer Financial.

Lots of liquidity

But it has not just been aggressive or ill-timed loans that have ruined many banks to date. The risky manner in which they funded their operations have also hit banks hard.

Many experts cite the industry practice commonly referred to as using "hot money," or brokered deposits.

These deposits come from other institutions looking to park their funds where they can get a nice return on their investment.

Banks, particularly ones that are looking to grow, like them because they are an easy way to get funds, which they can in turn use to issue more loans. But relying on hot money can be risky. It's an expensive source of funding and a volatile one, as brokers move their money from bank to bank seeking out the best returns for their customers.

Consider the case of Franklin Bank, a Houston-based lender that was seized by regulators last November. A report published this week by the FDIC's Office of Inspector General pointed out that the firm relied primarily brokered deposits in the months leading up to its failure.

Regulators have also become increasingly wary of banks' reliance on a similar practice in which banks take cash advances from the Federal Home Loan Bank system, a group of 12 government-sponsored banks that was created during the Great Depression to spur lending in small communities.

The practice, which is another way that banks can get funding to make more loans, has been trending higher in recent years. Last year, for example, the number of these advances issued to all U.S. banks and thrifts stood at $788 billion, up 45% from 2004 levels. And during the first three months of 2009 alone, banks have secured $697 billion in advances.

While relying on such money is commonplace in the banking industry, what worries regulators is that some lenders have become too reliant on these borrowed funds to maintain their everyday operations. In recent reports on several failed lenders, the agency's Office of Inspector General has also noted the advances have weighed on the bank's earnings.

Some risky bets

Organizations that represent small banks maintain, however, that most community lenders -- which make up about 90% of the 8,200 banks and thrifts across the country -- are quite secure and continue to be a key source of credit for borrowers across the country.

But like their peers on Wall Street, some got tangled up in the deadly and complex financial instruments that felled banking giants.

Five Illinois-based lenders that were seized last week by regulators, for example, lost their footing after investing in collateralized debt obligations, those notorious investment products that became infamous last year after prompting billions of dollars in writedowns at firms like Citigroup (C, Fortune 500) and Merrill Lynch.

Recent reports have also suggested that same group of lenders, including Rock River Bank and First National Bank of Danville, also wagered on trust-preferred securities, another complex investment product used commonly throughout the industry as a means for banks to raise capital.

Many investors were lured in by the attractive dividends that these pooled securities offered. But as the housing market and the broader economy deteriorated, those payments dried up, prompting investors, including the five banks in Illinois, to take a hit, notes Bobby Schwartz, a partner at the law firm Smith, Gambrell & Rusell, whose practice has focused on representing financial institutions in the Southeast.

"It may hurt, but most financial institutions were not concentrated in this type of investment," he said. These investments weren't fatal for most community banks.

"In many of the cases," said Bauer's Karen Dorway, "it really has gone back to the loans."