Speculative COMMERCIAL real estate lending + COMMERCIAL (MAI) real estate appraising = One $161 Billion Debacle.
One of the other causal factors contributing to thrift failures identified by the FDIC,
which was also one of the prevailing problems at Madison Guaranty, was speculative
commercial real estate lending:
Commercial real estate development is inherently risky, partly because of
the long gestation period of many commercial construction projects. When
completed projects finally come to market, demand conditions may have changed
considerably from what they were at the time of conception. . . .
In the early 1980s, booming activity in commercial construction was
supported by rapidly increased bank and thrift commercial mortgage lending. . . .
During the 1980s, when total real estate loans of banks more than tripled,
commercial real estate loans nearly quadrupled. . . . A pervasive relaxation of
underwriting standards took place, unchecked either by the real estate appraisal
system or by supervisory restraints. Overly optimistic appraisals, together with
the relaxation of debt coverage, of maximum loan-to-value ratios, and of other
underwriting constraints, meant that borrowers frequently had no equity at stake,
and lenders bore all of the risk.
Overbuilding occurred in many markets, and when the bubble burst, real
estate values collapsed. . . . At many financial institutions loan quality
deteriorated significantly, and the deterioration caused serious problems. . . .
17 U.S. Dep't of Justice, Attacking Financial Institution Fraud, Fiscal Year 1997 (Second
Quarterly Report) at 3. "Major" was "defined as (a) the amount of fraud or loss was $100,000 or
more, or (b) the defendant was an officer, director, or owner (including shareholder), or (c) the
schemes involved multiple borrowers in the same institution, or (d) [the] case involved other
major factors." Id.
18 Id.
19 Id.
v i
anks that failed in the 1980s had higher ratios of commercial real estate loans
to total assets than surviving banks. Failing banks also had higher ratios of
commercial real estate loans to total real estate loans, or real estate charge-offs to
total charge-offs, and of nonperforming real estate assets to total nonperforming
assets.20
http://a255.g.akamaitech.net/7/255/2422/18may20041514/icreport.access.gpo.gov/final/v1app2.pdf
http://www.harriscompanyrec.com
