The Office of the Comptroller of the Currency has warned its examiners that commercial real estate loans are deteriorating in many parts of the country and it is necessary for them to spend "additional time" reviewing and evaluating "loans in troubled real estate markets."
The glut of office space in several cities has forced many builders and building owners to take severe losses, and as a result, "many banks are faced with growing problems in real estate portfolios," Deputy Comptroller Michael Patriarca told examiners in a special, five-page bulletin issued late last month. The comptroller's office supervises the nation's 4,700 federally chartered banks.
Patriarca also warned examiners to ensure that banks have adequate and up-to-date appraisals of the value of buildings that are used as collateral on commercial real estate loans. The absence of such appraisals could be considered an "unsafe and unsound banking practice," for which banks are liable to sanctions.
The comptroller's office also confirmed that it has targeted several major banks for special audits of their real estate loans to determine whether those banks are properly valuing the loans on their books.
According to regulators, no more than 15 banks are targets of the special audits and nearly all are concentrated in Texas and California, where commercial real estate markets have deteriorated markedly in the last year.
Federal Deposit Insurance Corp. officials said they are auditing some banks with large real estate loan portfolios. Regulators said it is too soon to tell whether the audits will force any of the banks to take major writeoffs. If any big writeoffs are required, they would have an adverse effect on bank earnings.
New FDIC Chairman L. William Seidman said Tuesday that real estate loans, agricultural loans and energy loans are the three biggest areas of concern to regulators.
The comptroller's office has undertaken targeted audits several times in the last few years. In 1983, it did special examinations of banks that had a large amount of loans to drilling rig operators and last year did similar audits of banks with a heavy concentration of oil production loans.
Earlier this year, the comptroller's office examined the quality of shipping loans at banks that are major lenders to the economically distressed marine business.
A spokeswoman for the comptroller's office declined to name any of the banks involved in the commercial real estate examinations. She also declined to name the cities in which the banks are located and refused to say how many banks were being audited. Other sources said there were about a dozen banks targeted by the comptroller's office and no more than three by the FDIC. Nearly all the banks are located in Texas and California.
In the memo, Patriarca listed a number of "warning signs" for examiners, including loans to projects that are granting rent concessions or sales discounts and to projects that have changed their plan, such as a condominium project that has converted to an apartment house.