Observations of a Workout Guy - Part 3
I have posted two articles over the past month where I shared my observations made during my 25 years in banking and more specifically, working out problem loans. Part 1 included warning signs and how to tackle problems early in the process. Part 2 included recommendations for servicing loans that continue to deteriorate. Here in Part 3, I talk about loans that have reached a tipping and review steps a bank should consider to achieve a satisfactory solution.
Who is better suited to sell the collateral? If honestly answered, it is very rarely the bank. The Borrower knows the collateral, knows the market and has the most to lose. Bankers must develop strategies that encourage the borrower to become a partner in the workout process instead of an adversary. If handled well by the bank, the borrower will become a de factoworkout officer and foreclosure/repossession may be avoided.
“We can sell the property once we control it”: Bankers have made this statement to me many times and sometimes they are correct, especially when foreclosure/repossession is the only solution (i.e. a junior lienholder is exercising its rights, IRS liens). However, we need to keep in mind that foreclosure/repossession is not a resolution or endpoint. The asset will remain an NPA until it is liquidated. While the bank may recognize a loss at this juncture, typically the larger loss is recognized at liquidation and only after taking on sometimes very high carrying costs and paying sales commissions.
“I may want to buy that collateral myself”: I have heard this often from bankers and even directors. We cannot fall in love with our collateral. If the property was truly valuable/marketable, the borrower would have made the project work or sold it for the debt. Plus, a property is often tainted in the marketplace once the bank assumes ownership further reducing its value. Bankers need to be reasonable in their valuation of the collateral and maintain appropriate, unemotional expectations.
Finally, I have worked with banks that have established an OREO reserve account that allows the bank to provision for expected losses in its OREO portfolio. This can be an excellent way to manage down your OREO portfolio over time rather than recognizing large losses at liquidation. Of course, this will need to be reviewed by the CFO and bank’s audit firm prior to implementation.