[DEBATE] : Banks Find New Ways To Ease Pain of Bad Loans

[Riaz K Tayob]

Banks Find New Ways To Ease Pain of Bad Loans By DAVID ENRICH/June 19, 
2008; Page C1

In January, Astoria Financial Corp. told investors that its pile of 
nonperforming loans had grown to about $106 million as of the end of 
last year. Three months later, the thrift holding company said the 
number was just $68 million.

How did Astoria do it? By changing its internal policy on when mortgages 
are classified on its books as troubled. The Lake Success, N.Y., company 
now counts home loans as nonperforming when the borrower misses at least 
three payments, instead of two.

Astoria says the change was made partly to make its disclosures on shaky 
mortgages more consistent with those of other lenders. An Astoria 
spokesman didn't respond to requests for comment. But the shift shows 
one of the ways lenders increasingly are trying to make their 
real-estate misery look not quite so bad.

 >From lengthening the time it takes to write off troubled mortgages, to 
parking lousy loans in subsidiaries that don't count toward regulatory 
capital levels, the creative maneuvers are perfectly legal.

Yet they could deepen suspicion about financial stocks, already 
suffering from dismal investor sentiment as loan delinquencies balloon 
and capital levels shrivel with no end in sight.

"Spending all the time gaming the system rather than addressing the 
problems doesn't reflect well on the institutions," said David Fanger, 
chief credit officer in the financial-institutions group at Moody's 
Investors Service, a unit of Moody's Corp. "What this really is about is 
buying yourself time. ... At the end of the day, the losses are likely 
to not be that different."

Still, as long as the environment continues to worsen for big and small 
U.S. banks, more of them are likely to explore such now-you-see-it, 
now-you-don't strategies to prop up profits and keep antsy regulators 
off their backs, bankers and lawyers say.

At Wells Fargo & Co., the fourth-largest U.S. bank by stock-market 
value, investors and analysts are jittery about its $83.6 billion 
portfolio of home-equity loans, which is showing signs of stress as 
real-estate values tumble throughout much of the country.

Until recently, the San Francisco bank had written off home-equity loans 
-- essentially taking a charge to earnings in anticipation of borrowers' 
defaulting -- once borrowers fell 120 days behind on payments. But on 
April 1, the bank started waiting for up to 180 days.

'Out of Character'

Some analysts note that the shift will postpone a potentially bruising 
wave of losses, thereby boosting Wells Fargo's second-quarter results 
when they are reported next month. "It is kind of out of character for 
Wells," says Joe Morford, a banking analyst at RBC Capital Markets. 
"They tend to use more conservative standards."

Wells Fargo spokeswoman Julia Tunis says the change was meant to help 
borrowers. "The extra time helps avoid having loans charged off when 
better solutions might be available for our customers," she says. In a 
securities filing, Wells Fargo said that the 180-day charge-off standard 
is "consistent with" federal regulatory guidelines.

BankAtlantic Bancorp Inc., which is based in Fort Lauderdale, Fla., 
earlier this year transferred about $100 million of troubled 
commercial-real-estate loans into a new subsidiary.

That essentially erased the loans from BankAtlantic's retail-banking 
unit. Since that unit is federally regulated, BankAtlantic eventually 
might have faced regulatory action if it didn't substantially beef up 
the unit's capital and reserve levels to cover the bad loans.

Because the BankAtlantic subsidiary that holds the bad loans isn't 
regulated, it doesn't face the same capital requirements. But the new 
structure won't insulate the parent company's profits -- or shareholders 
-- from losses if borrowers default on the loans, analysts said.

Alan Levan, BankAtlantic's chief executive, declined to comment on how 
much the loan transfer bolstered the regulated unit's capital levels. 
"The reason for doing it is to separate some of these problem loans out 
of the bank so that they can get special focus in an isolated 
subsidiary," he said.

Other lenders have been considering the use of similar "bad-bank" 
structures as a way to cleanse their balance sheets of shaky loans. In 
April, Peter Raskind, chairman and CEO of National City Corp., said the 
Cleveland bank "could imagine...several different variations of 
good-bank/bad-bank kinds of structures" to help shed problem assets.

Two banks that investors love to hate, Wachovia Corp. and Washington 
Mutual Inc., troubled some analysts by using data from the Office of 
Federal Housing Enterprise Oversight when they announced first-quarter 
results. Other lenders rely on a data source that is more pessimistic 
about the housing market.

Charter Switch

Another eyebrow raiser: switching bank charters so that a lender is 
scrutinized by a different regulator.

Last week, Colonial BancGroup Inc., Montgomery, Ala., announced that it 
changed its Colonial Bank unit from a nationally chartered bank to a 
state-chartered bank, effective immediately.

That means the regional bank no longer will be regulated by the Office 
of the Comptroller of the Currency, which has become increasingly 
critical of banks such as Colonial with heavy concentrations of loans to 
finance real-estate construction projects.

Instead, Colonial's primary regulators now are the Alabama Banking 
Department, also based in Montgomery, and the Federal Deposit Insurance 
Corp. The change probably "is meant to distance [Colonial] from what is 
perceived as the more aggressive and onerous of the bank regulators," 
said Kevin Fitzsimmons, a bank analyst at Sandler O'Neill & Partners.

Colonial spokeswoman Merrie Tolbert denies that. Being a state-chartered 
bank "gives us more flexibility" and will save the company more than $1 
million a year in regulatory fees, she said.

Trabo Reed, Alabama's deputy superintendent of banking, said his 
examiners won't give Colonial a free pass. "There's not going to be a 
significant amount of difference" between the OCC and state regulators, 
he says. Copyright 2008 Dow Jones & Company, Inc