Certain US banks are preparing to sell loans tied to real estate assets at a discounted price, even when borrowers are meeting their repayment obligations. This indicates their determination to minimize their exposure to the precarious commercial real estate market, according to a recent report in Financial Times, and the decision to accept losses on performing real estate loans follows multiple warnings that this asset class could be the “next shoe to drop” following recent turmoil in the US regional banking sector.
Chad Littell, an analyst at CoStar, a commercial real estate research company, noted that the intention of banks to sell loans is becoming a common topic of conversation. He mentioned hearing about it more frequently than at any other time in the past decade.
HSBC USA is reportedly in the process of selling hundreds of millions of dollars of commercial real estate loans, potentially at a discount. This move is part of their strategy to wind down direct lending to US property developers. Similarly, PacWest recently sold $2.6 billion worth of construction loans at a loss. Several other banks are also facilitating such sales in the future by altering the way they handle commercial real estate debt in their accounting practices.
Typically, banks hesitate to incur losses on large loan portfolios that retain their full value as long as borrowers make timely repayments. However, some banks are now convinced to take this step due to concerns about a potential rise in delinquencies, particularly for loans secured against office properties, which have experienced reduced demand due to the enduring popularity of remote work.
Moreover, a slowdown in demand for commercial mortgage-backed securities has left banks of all sizes with a higher amount of property debt than desired by both the banks and regulators.
Although offloading performing loans is not as prevalent as it was during the 2008 crisis, many market participants anticipate an increase in such deals this year and the next.
David Aviram, a principal at Maverick Real Estate Partners, a private fund specializing in commercial real estate loans, stated that as banks approach the end of the second quarter, they are highly focused on maintaining a clean loan book. The banks aim to avoid raising concerns among regulators or investors.
These moves by banks to sell off loans align with the rising concerns voiced by executives and regulators regarding the health of the commercial real estate sector. Wells Fargo’s CEO, Charlie Scharf, acknowledged that the bank, which has $142 billion in commercial real estate loans outstanding, will incur losses in this area. Martin Gruenberg, chair of the US Federal Deposit Insurance Corporation, warned about the challenges faced by real estate loans, especially those backed by office properties, if demand remains weak and property values continue to decline.
In addition to loan sales, other banks are changing their loan designations from “hold to maturity” to “available for sale,” making it easier to offload debt in the future. Citizens, which has been reducing its commercial property lending, significantly increased its stock of loans available for sale to $1.8 billion during the first quarter. However, the bank does not disclose the percentage of those loans allocated to commercial real estate borrowers.
Customers Bancorp, based in suburban Philadelphia, reduced its commercial real estate lending by nearly $25 million in the first quarter. It also reclassified $16 million of these loans as “held for sale,” up from zero in the previous quarter.
A loan broker reported preparing to bring several deals to the market in the coming weeks, witnessing the highest level of activity in three years.
Discounts applied to the sale of performing loans outside of the office sector are relatively modest and are partially influenced by rising interest rates. For example, Kennedy Wilson, a real estate investment group, agreed to pay $2.4 billion, or 92 cents on the dollar, for a block of PacWest loans with an aggregate principal value of $2.6 billion. PacWest’s shares rose by nearly 20 percent after the transaction was announced.
A real estate credit investor mentioned that it had received more calls as a result of PacWest’s successful deal with Kennedy Wilson. Other regional banks are considering executing similar transactions based on the positive market response.
Regarding the HSBC sales process, bids for the loans are reportedly pricing them in the mid-90s as a percentage of their face value, implying a potential loss of up to 5 percent for the bank. However, HSBC has not yet decided if it is willing to accept a loss of this magnitude, according to another source familiar with the process. HSBC declined to provide a comment on the matter.