U.S. set to ease appraisal rules for banks

February 23, 1991|By Robert A. Rankin | Robert A. Rankin,Knight-Ridder News Service

WASHINGTON -- Taking a big step down the same path that led taxpayers to a $500 billion disaster with the savings and loan industry, the Bush administration's bank regulators intend to relax key bank-oversight rules next week.

Federal standards governing appraisals of bank loans for commercial real estate developments will be eased in an effort to help sinking banks grow out of trouble by making new loans.

"It's a way of sweeping potential problems under the rug for a while," said Robert A. Eisenbeis, a professor of banking at the University of North Carolina. "I would rather see them not go down this path. I think it's very dangerous."

In the 1980s, when S&Ls started sinking into debt, federal regulators suspended enforcement of oversight rules and encouraged S&Ls to "grow their way out" of trouble by making new loans. Regulators called that policy "forbearance." Under forbearance, hundreds of S&Ls lent themselves into bankruptcy that will cost taxpayers up to $500 billion more than 40 years to fix.

Many experts fear the change in bank rules is a step in the same direction. "Clearly, that's a danger," said Robert Litan, a Brookings Institution economist and consultant to the House Banking Committee.

Many banks are buckling under the weight of bad commercial real estate loans. Since 1986, 62 percent of all bank loans went to finance commercial real estate developments, which now constitute 25 percent of all bank assets.

The United States grossly overbuilt such commercial projects during the booming 1980s. Now many of those developments are not able to pay back their banks. Between 180 and 230 banks will fail this year, according to the Federal Deposit In surance Corp.

The key rule change would appraise a property's value based on a subjective judgment of its long-term worth rather than of the price it could command if sold immediately on the open market.

The Treasury Department intends to announce details of the newly relaxed standards Tuesday or Wednesday, but preliminary descriptions emerged this week.

Defending the proposed change, Federal Reserve Board Chairman Alan Greenspan told the Senate Banking Committee this week that "an appraisal, by its nature, is almost invariably a value that is put on a property for short-term sale. . . . Yet a loan on a property is not a short-term loan. . . . And the value and the ultimate profit of that loan is determined by the repayments of the borrower over the life of the loan."

"I think that's a euphemism for saying they don't want to value properties at their market value," Mr. Eisenbeis countered. "If they are saying the property is worth more than people are willing to pay for it, then they're saying they know something other people don't, or it's nothing but forbearance."

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