Fallout After The Credit Bomb

"Presently banks have been more aggressive in cleaning up their loan books which has required them to recognize troubled loans and reserve more for loan losses. Part of the trend is that bank regulators have been stricter with banks, requiring them to move loans to non-accrual status or "other real estate owned" status. Most of these loans are commercial real estate loans (CRE).

Another part of the trend, the most important part, is that bankers have now realized that renewing loans will not solve their problems:

At the end of the third quarter, roughly 41 percent of the $29 billion of restructured loans among small banks [less than $20 billion of assets] were in default, according to call reports compiled by Foresight Analytics.

That figure indicates some bankers were too hopeful that giving borrowers a little more time with smaller payments would fix the ongoing problems, analysts said.

As one bank representative pointed out, loans cannot be rewritten based on expectations that the borrower's condition will heal before the grace period is up.

"Hope is not a strategy," said Jason Korstange, a spokesman for TCF Financial Corp. in Wayzata, Minn. "You simply have to underwrite these loans to the present conditions, and some are going to qualify and some are not."

Thus more loans are being labeled as "troubled debt restructurings" (TDRs) which allows lenders to take less of a loss than if they moved the loan to non-accruing status, but most significant is that more and more loans are now being labeled TDRs. These banks "reported more than $21 billion nonresidential [CRE] restructured loans as of Sept. 30, rising 63 percent from a year earlier and making up nearly three-fourths of all TDRs." It's not limited to the smaller banks. Banks with more than $20 billion in assets: "TDRs jumped 75 percent at Sept. 30, compared with a year earlier, to $89.7 billion."

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