Financial institutions here, like their counterparts nationally, are being forced to deal increasingly with the myriad costs and management responsibilities of property ownership as they've had to foreclose on more commercial and residential real estate.
Some have gone to substantial lengths to avoid foreclosing on borrowers who have defaulted, figuring that being as flexible as possible on loan payments is less expensive than becoming the owners of the properties for the indeterminate amount of time it takes to sell them.
"It's pretty safe to say banks are generally not interested in diversifying our business models by owning properties and businesses," says Kelly McPhee, spokeswoman for Spokane-based AmericanWest Bank.
Scott Southwick, chief credit officer at Spokane's Inland Northwest Bank, says he considers the bank-owned properties to be "a thorn and a pain."
Institutions that end up owning properties used as loan collateral are retaining commercial real estate agencies to manage and market the properties, though not reportedly to a huge extent here yet, or are assigning people internally to oversee those tasks, or both. Some banks here now have portions of their Web sites dedicated to property listings, or links to where those properties are listed.
When banks take back properties through foreclosures, or borrowers simply walk away from properties, the banks are left with paying utilities and taxes on the properties, keeping them maintained and secure, and keeping appraisals current, which regulators require. They also sometimes must clean up or update the properties to make them as marketable as possible.
"Just by being the lender, banks know there's a small possibility of property coming to us, but in this prolonged downturn, the frequency is much higher than anyone expected," McPhee says. Typically, she says, "You're not only getting the property back, but having to immediately invest in it, so it's kind of coming at you from two directions." Selling the properties, she says, often is "not that easy for the same reason that everybody else's 'for sale' sign is still up."
Adds McPhee, "For us, we certainly have not hired anyone additional (internally) to do this. We primarily partner with people who have expertise in those fields, people who already understand the property."
AmericanWest recently began posting properties on its Web site, and as of early last week, more than 30 properties of various types were listed there, ranging from the upscale Legacy Ridge housing development site at Liberty Lake to a seven-building commercial condominium complex in Scottsdale, Ariz. Listed as contacts for the properties are a mix of bank officers and real estate specialists.
AmericanWest Bancorp., parent of AmericanWest Bank and Far West Bank, has been working under tight Federal Deposit Insurance Corp. scrutiny to correct lingering capital deficiencies that stem partly from the collapse of the real estate lending market.
The much larger Sterling Financial Corp., Spokane-based parent of Sterling Savings Bank and Golf Savings Bank and which also has been working to put together a recapitalization and recovery plan, is in the midst of a large private stock offering. For that reason, the company declined to be interviewed for this article.
As of early last week, though, a Web site that Sterling launched late last year to market discounted real estate showed 130 properties owned by the two banks for sale in seven Western states, eight at prices of $1 million or more, and 293 builder-owned, bank-financed properties for sale in five states, 13 priced at over $1 million. The listings are posted under commercial, condominium, single-family residence, and lots-and-land categories.
Banks classify foreclosed and repossessed real estate as nonperforming assets for financial reporting purposes and refer to them by the acronym OREO, meaning "other real estate owned," to differentiate them from properties in which the institutions have invested purposely.
Sterling's nonperforming assets at the end of the first quarter were $1.07 billion, up from $987.4 million at the end of last year and $670 million at the end of the first quarter of 2009. Greg Seibly, Sterling Financial's president and CEO, said in the company's latest earnings report that "more than three-quarters of the company's nonperforming loans are collateral-dependent and are carried at fair market value."
He said Sterling has recognized cumulative confirmed losses on those loans of about $530 million and carries them at 60 percent of original value on its balance sheet. In addition, he said, Sterling has established a specific reserve of $19 million against those loans just to cover possible valuation changes between appraisals.
"The recorded fair values of these assets reflect the declines in real estate values seen to date and should provide us with greater flexibility to achieve the resolution of these assets in the future," he said.
Though Sterling might be the largest and most prominent local example, those interviewed say banks here routinely are selling such properties at substantial discounts, accepting a payoff of less than the balance due on the loans just to get the properties off of their books.
AmericanWest, which has been marking properties down to their reduced appraised values, sold 44 properties last year, and those properties sat on the market for an average of four months, McPhee says. Some sell quickly, but others that have liens or other complicating factors can "take quite a while to unwind" before they even can be offered for sale, she says.
Inland Northwest Bank's Southwick says, "If you look at our NPAs (nonperforming assets), they're certainly higher than we would like them to be," but he adds that with fewer than a dozen such properties at last count, "the number that we have is somewhat manageable."
He says, "We probably have sold three or four properties over the last 90 days or so, which has been good," particularly compared with the latter half of 2008, when marketed properties were attracting "not even a phone call."
Southwick says, "We almost always list a property pretty quickly, as soon as it's in a position to be marketed. We list it with a professional Realtor and try to get it out of there and get it sold. We're pretty fond of using local Realtors," who know the Spokane-area market.
The Realtors will let the bank know if some maintenance tasks need to be attended to, he says. In one such instance, the bank hired an employee's husband, who was out of work, to handle those maintenance chores.
Also, he says, "We have a couple of handymen kinds of guys we've been in touch with" who can help with maintenance and minor improvements on an as-needed basis.
Southwick says Inland Northwest Bank, probably like most community banks, is striving to be as accommodating as possible with tardy borrowers to avoid having to assume ownership of their properties.
"If we have a borrower who is committed, who is engaged, who is working on a solution, we're pretty flexible in coming up with a plan where they can stay there," he says. But, he adds, "The minute they've given up, we move pretty aggressively."
With delinquent borrowers, Southwick says, "Probably half of them will start out with a good attitude and start to work with you, but ultimately their staying power seems pretty limited. Once they're 90 days past due, probably 80 percent walk away."
Credit unions haven't been immune from the property-repossession trend, or the pain of ownership. Tom Johnson, executive vice president at Spokane Teachers Credit Union and the named successor to President and CEO Steve Dahlstrom, says STCU has had no more than nine foreclosed properties on its books at any given time, but strives to secure them right away to ensure that no one's living in them who shouldn't be. It then makes any necessary repairs and puts them on the market as soon as possible.
Citing an example in which it recently sold a Hayden, Idaho, house for $235,000 that four years ago had an appraised value of $400,000, he says, "It's a real haircut for both the member and the credit union."
Dave Black, top executive at NAI Black, says that big Spokane commercial real estate services company probably hasn't garnered as much real estate management and liquidation business from financial institutions here as it expected it would, given the slow economy.
"The banks have been very reluctant to foreclose and take properties to the courthouse steps through a trustee's sale," he says. "They tend to want to work with their borrowers to resolve issues rather than foreclose. They don't like them on their balance sheets even though a lot of times those loans, they've already written them down."
Still, he says, NAI Black "has gotten very involved in working with financial institutions," such as to value properties for them and to act as receivers in a handful of cases.
Also, he says, "We're listing agent for a number of borrowers and there's a lot of property-management opportunities, so our range of services fits that function perfectly, and it has resulted in an increase in business. I would say there's a lot more to come, because the banks have really, really been slow to try to force their borrowers out."
There are signs, though, that the market is beginning to turn around.
AmericanWest's McPhee says, "We are seeing quite a bit more activity in this area and currently have several properties where we're entertaining multiple offers," which is a dramatic improvement from a year or even three months ago.
Among other upbeat signs, the Puget Sound Business Journal reported recently that while demand and prices for land in King, Pierce, and Snohomish counties still are depressed compared with the height of the market in 2006, a small group of local and national home builders is emerging to snap up unfinished projects repossessed by banks.
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