FDIC chief floats possibility of new lending laws: banks voluntarily change policies to forestall bad loans.

FDIC chief floats possibility of new lending laws

Banks voluntarily change policies to forestall bad loans

Money for Southland real estate is so scarce that developers who want loans may be required to plunk down twice as much of their own cash than they did two years ago and then still may not get what they want, according to California bankers.

Pressure from bank regulators is so great and the real estate market is so overbuilt that "I don't know of any banks looking for new construction financing," said Robert Hamaguchi, chair of the real estate committee of the California Banker's Association and senior vice president at Security Pacific Corp. The change in banks' lending policies began to occur in mid-1989, he said.

Prior to 1989, banks required developers to put up from zero to 15 percent of equity in a project to get a loan, Hamaguchi said. Now, banks are requiring a minimum of 15 to 20 percent and a maximum of 25 to 30 percent, he noted.

Although banks are changing real estate lending policies voluntarily, there is some move to make equity requirements part of the law. In Washington D.C. last month, FDIC Chairman L. William Seidman, speaking before the U.S. House Banking Committee, suggested that regulations requiring builders to contribute a certain percentage of equity in a project be reinstated.

Prior to 1974, national banks were prohibited from making loans on raw land and from making loans unless the developer contributed 25 percent of the equity in a project, Seidman said. The laws were relaxed in 1974 and 1982.

Of all non-performing loans nationwide, 46.2 percent are real estate related, Seidman said.

In a speech Seidman made to the Graduate School of Business at the University of Rochester, he said he backed away from that position after receiving phone calls from "unhappy realtors, developers and people in the construction industry," according to a transcript of his remarks.

Also in the speech, Seidman said "reinstating the old laws, just as they were, may not solve today's problems," the transcript reported.

J. Chip Morrow, president and chief executive officer of Marathon National Bank in West Los Angeles and vice chairman of the California Bankers Association real estate committee, said that bankers are talking about the possibility that a law will be passed, but not until next year.

"Most of the people in the know in the banking industry feel that this year is a year of preliminary posturing," Morrow said. "Something will be done unless the economy and and real estate market adjust themselves through time," he predicted.

Morrow noted banks have voluntarily changed policies. "We require between 20 and 25 percent cash in a deal. It makes it hard for the developers who are used to 10 percent," Morrow said.

But many banks won't lend at all, no matter how much equity a developer will put in a project, Morrow said. The only time many banks will make a new construction loan is if an old one is paid off, he said. And banks will not lend on projects proposed for saturated commercial markets, he said. "I've seen instances where the appraisal on a project came in lower that what the building costs are," Morrow said.

On top of poor market conditions, bankers report that state and federal regulators are putting pressure on banks to stay away from bad real estate loans.

Richard Mount, a member of the board of directors of the Federal Reserve Bank in San Francisco, said that bank regulators are putting pressure on banks in California because of a concern that the state's real estate market could collapse, like the real estate markets in Texas, New England and Arizona. "Out here, the regulators have made it clear that California is not going to be next," Mount said.

Regulators have the power to force banks to "take a write off, which directly affects the bank's bottom line," he said.

Phillip Vincent, vice president and economist for First Interstate Bancorp in Los Angeles, who is studying real estate lending in California, said, "There is no secret that our front line (loan) people have indicated that the regulators have really clamped down," Vincent said.

Regulators scrutinizing loans question the credit worthiness of the loan as well as the appraisal of the property, Vincent said. But the regulators aren't the only reason banks have tightened lending. "There have been a lot of losses in real estate. The banks themselves are concerned," Vincent said.

Banks have also experienced situations in which real estate developers that loan departments "have been courting for years show up on your doorstep" because the developers have been turned away by the regular bank. The loan department which had been trying to take them away from their bank has to turn them down, too, Vincent said.

"The world has changed," he said.