Alan Jaffa Comments on Assets Exiting Bank Books
On February 18, Crain’s Cleveland Business published an article titled More Problem Assets Exit Bank Books. In it, Safeguard’s Alan Jaffa, CEO, is quoted explaining how assets may be off the bank’s books but in another entity’s portfolio.
More problem assets exit bank books
Number of foreclosed properties owned by most local financial institutions is falling
The volume of foreclosed properties owned by most local banks fell last year by double-digit percentages, in some cases by the steepest rates since the foreclosure crisis struck — a corner bankers say was turned thanks to an improving real estate market and fewer properties going into foreclosure.
Institutions big and small reported that they carried as of Dec. 31 the lowest level of foreclosed property since at least 2010, which observers say should mean fewer vacant homes in neighborhoods and more lending by banks less burdened by foreclosed assets.
“Some of the problems banks have been wrestling with for four or five years are being resolved,” said Charlie Crowley, an investment banker who works primarily with financial institutions. “It’s good for profitability, and also a sign … that more (consumers) are probably getting their debts under control.”
KeyCorp’s foreclosed assets were valued at $22 million as of Dec. 31, down 66% from $65 million at Dec. 31, 2011, and down 83% from $129 million at Dec. 31, 2010, according to public filings.
Others shedding problem assets include regional giant Columbus-based Huntington Bancshares Inc., which reduced its portfolio by 27% in 2012 and by 42% in 2011, and tiny Middlefield Banc Corp., which trimmed its foreclosed assets by 16% last year.
Similar improvement during 2012 was reported by LNB Bancorp Inc. and Cincinnati-based Fifth Third Bancorp, according to data from SNL Financial.
“Overall, the (real estate) market has stabilized,” said Dale Clayton, senior vice president and national manager of the asset recovery group for KeyBank. “We still have consumer mortgages (in foreclosure) … that will continue to be higher than average until employment rates improve, (but) our bank is pretty much through the real estate crisis.”
One exception is PNC Financial Services Group Inc., which acquired Cleveland-based National City Corp. in 2008: Its line item for “other real estate owned” — or OREO, the term for foreclosures in bank filings — has increased every year since 2007 and stood at $920 million at Dec. 31, 2012, up 5% from $876 million as of Dec. 31, 2011, and up 10% from $835 million as of Dec. 31, 2010, SNL reported.
Industrywide, aggregate OREO stood at $38.5 billion as of Dec. 31, 2012, down 16% from $46 billion the year before and down 27% from $52.6 billion as of Dec. 31, 2010, according to SNL.
The industrywide decline in OREO portfolios largely is the result of the improving housing market, which observers say is firming up housing prices and increasing sales.
“This has been mostly a real estate-led recovery as opposed to a jobs-based recovery,” said Tim O’Dell, CEO of Central Federal Corp., the Fairlawn parent company of CFBank.
Although the company hasn’t reported its year-end numbers for 2012, Central Federal’s foreclosed assets fell 47% to $2.4 million on Dec. 31, 2011, from $4.5 million as of Dec. 31, 2010.
When banks foreclose on properties, they write them down to appraised levels, said Mr. Crowley, a Cleveland managing director for Philadelphia-based Boenning & Scattergood Inc. In recent years, there were not always buyers of the properties even at those levels, and banks “were reluctant in many cases to recognize steeper losses than they had already taken,” which would have happened had they sold properties below their appraised values, Mr. Crowley said.
And if the banks’ capital levels were stretched, they were even less inclined to take bigger hits by selling properties, he noted.
“Now that the real estate market has recovered somewhat, it is much easier for these banks to sell OREO properties without significant additional losses,” Mr. Crowley said. “Also, as the banks have boosted their capital levels over the last couple of years, they are able to tolerate additional losses in some cases just to get rid of problems.”
Mr. O’Dell agreed that buyers had been scarce.
“There were times that, even if you were willing to sell a property at a significant discount, there just weren’t many buyers out there,” he said. “We have seen the return of interested buyers in these properties. It gives us confidence to go out and make new loans.”
KeyBank’s Mr. Clayton said there is “significant capital in the market that continues to chase distressed real estate assets.” When investors are buying up more distressed loans and commercial notes, fewer of those distressed assets end up in foreclosure, Mr. Clayton said.
“Lenders, not developers’
Fewer foreclosed assets on their books saves banks money, as foreclosed properties are expensive to own, Mr. Clayton said. The average lifetime cost to hold and sell such assets, Mr. Clayton estimated, is 10% to 12% of their value.
A bank’s costs include the hiring of property managers and the engagement of brokers to sell properties; all the while, the foreclosed assets aren’t earning the interest they were supposed to glean.
A number of institutions noted in their earnings releases last month that their noninterest income increased, in part, because their costs associated with “other real estate owned” had decreased.
“We’re not really good owners of real estate,” Mr. Clayton said. “We’re lenders, not developers.”
KeyCorp’s other real estate owned portfolio now is at a normalized level, Mr. Clayton said, and that returns capital to the bank for other uses, such as lending.
It also means a cut to the related work force: KeyCorp’s full-time-equivalent workout employees — or those who modify and manage nonperforming assets — are down two-thirds from the staff’s height in 2009 and 2010, Mr. Clayton said. Some of those employees are commercial lenders who now have returned to making loans.
“The struggle now is how do you reduce staff as quickly as you reduce assets and be as efficient as possible,” he said.
The decline in foreclosed properties on bank books is a very positive development, said Kevin T. Jacques, who for 14 years worked for the U.S. Department of the Treasury and now is the Boynton D. Murch Chair in Finance at Baldwin Wallace University.
“It should mean the worst of that should be over, and we can begin to start to see fewer vacant properties and a stabilization of our neighborhoods,” Dr. Jacques said.
“Is this sustainable? Depends on two things,” Dr. Jacques added. “One, how large is banks’ remaining inventory of OREO, and two, what happens to the national and regional economy in 2013?”
Off the books
Contrary to many banks’ balance sheet numbers, Safeguard Properties, a Valley View company that maintains defaulted and foreclosed properties for mortgage servicers, is not experiencing a decline in the total number of foreclosed properties and expects volumes to remain consistent for the next couple years, CEO Alan Jaffa said.
A decrease in the number of foreclosed properties on a bank’s balance sheet does not necessarily mean the property is no longer an unsold foreclosure, he wrote in an email. That’s because some properties — particularly those with government-sponsored investors and those with government-backed loans — are conveyed to those investors after a foreclosure is completed.
“The property may no longer be on the bank’s books, but may be an (OREO) in a different entity’s portfolio,” Mr. Jaffa said.
He also noted that Safeguard Properties is not seeing a decrease in default rates and in the number of properties in default 120 days or older, which Mr. Jaffa said often are “predictors of future foreclosure filings.”
To view the online article, please click here.
Safeguard Properties is the largest mortgage field services company in the U.S. Founded in 1990 by Robert Klein and based in Valley View, Ohio, the company inspects and maintains defaulted and foreclosed properties for mortgage servicers, lenders, and other financial institutions. Safeguard employs approximately 1,700 people, in addition to a network of thousands of contractors nationally. Website: www.safeguardproperties.com.