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As you say, it means the bank’s underwriting process failed. It makes more sense to me that they eat the loss caused by their error and auction off the property

by User23 5y ago

As you say, it means the bank’s underwriting process failed. It makes more sense to me that they eat the loss caused by their error and auction off the property at a price the rental market will bear. Papering over bad underwriting with dishonest valuations doesn’t strike me as worth sacrificing cities’ commercial vibrancy for.

sokoloff 5y ago
That's the thing the bank is (sort of) "trying to do" and the landlord is seeking to prevent them doing. If the landlord lowers the rent such that the property would now be in violation of the loan covenants, the bank has the option to foreclose on the loan and auction the property off. If the landlord does not lower the rent, they can avoid being in violation of the loan covenants and the bank does not have the right to foreclose and force an auction (provided the landlord keeps making the loan payments, of course). If the bank has a loan on the books that’s being paid-as-agreed and is in compliance with the agreed ratios, it's not at all clear to me that there's been an underwriting mistake and consequently I don't think that giving them the power to foreclose is in the public or borrower’s interests. (Giving them the option is technically always in the bank’s interests, but if the loan’s being paid, they’re not likely to exercise the option anyway.)
- User23 5y ago
  > I f the bank has a loan on the books that’s being paid-as-agreed and is in compliance with the agreed ratios, it's not at all clear to me that there's been an underwriting mistake and consequently I don't think that giving them the power to foreclose is in the public or borrower’s interests. This view is implicitly premised on the notion that banks exist purely to make a profit. I take the view that banking licenses are issued by the government representing the public and that licensees should act in a way that benefits the community in which they are licensed to operate. Using a dishonest valuation scheme that blights urban commercial districts violates that public purpose. I have no strong opinion on how the lender and borrower ought to work out the costs of accepting reality, and I acknowledge that it probably needs to be handled with finer granularity than some blanket policy.
  - sokoloff 5y ago
    The question remains "how [and when] do we determine that this specific property is being valued dishonestly?" If commercial property commonly has 2 year vacancies (as a matter of the inherent friction in finding a user who needs exactly that amount/mix/configuration of space), how does one determine that 123 Commercial St that's been vacant for 9, 12, 15, or even 30 months is being incorrectly valued or valued at less than the bank's note? It sounds to me like you're perhaps pulling on the wrong rope. If your concern is encouraging occupancy, go directly to policies that encourage occupancy rather than concluding that this is banking problem at its root. Maybe it is; maybe it isn't, but rather than trying to puppeteer an outcome by tweaking something in banking, there might be more direct policy frameworks that would help more.
    - User23 5y ago
      This is circular reasoning. These multi-year vacancies exist precisely because the present regime encourages it. One determines the appropriate vacancy rate and then tunes the regulatory framework to remove barriers to achieving that public purpose. The most direct policy framework would be wielding the sledgehammer that is eminent domain. However, I think government should use the lightest touch possible to achieve the public purpose, so I’d prefer setting the rules in a way that maximizes freedom while still achieving the public purpose of having non-blighted commercial districts.
      - sokoloff 5y ago
        It’s not just banking ratios that cause this behavior, though, but rather in part the owners of commercial property, often let out for 5 year terms with 2 5-year renewal options, who don’t want to be too quick to lower their rental base for possibly 15 years for a 1-2 year recession. Property with no bank note on it would behave the same way. (It’s just exceedingly rare, especially in an easy-borrowing, money-printing presses running environment.

by User23 5y ago

sokoloff 5y ago

That's the thing the bank is (sort of) "trying to do" and the landlord is seeking to prevent them doing. If the landlord lowers the rent such that the property would now be in violation of the loan covenants, the bank has the option to foreclose on the loan and auction the property off. If the landlord does not lower the rent, they can avoid being in violation of the loan covenants and the bank does not have the right to foreclose and force an auction (provided the landlord keeps making the loan payments, of course). If the bank has a loan on the books that’s being paid-as-agreed and is in compliance with the agreed ratios, it's not at all clear to me that there's been an underwriting mistake and consequently I don't think that giving them the power to foreclose is in the public or borrower’s interests. (Giving them the option is technically always in the bank’s interests, but if the loan’s being paid, they’re not likely to exercise the option anyway.)

User23 5y ago
> I f the bank has a loan on the books that’s being paid-as-agreed and is in compliance with the agreed ratios, it's not at all clear to me that there's been an underwriting mistake and consequently I don't think that giving them the power to foreclose is in the public or borrower’s interests. This view is implicitly premised on the notion that banks exist purely to make a profit. I take the view that banking licenses are issued by the government representing the public and that licensees should act in a way that benefits the community in which they are licensed to operate. Using a dishonest valuation scheme that blights urban commercial districts violates that public purpose. I have no strong opinion on how the lender and borrower ought to work out the costs of accepting reality, and I acknowledge that it probably needs to be handled with finer granularity than some blanket policy.
- sokoloff 5y ago
  The question remains "how [and when] do we determine that this specific property is being valued dishonestly?" If commercial property commonly has 2 year vacancies (as a matter of the inherent friction in finding a user who needs exactly that amount/mix/configuration of space), how does one determine that 123 Commercial St that's been vacant for 9, 12, 15, or even 30 months is being incorrectly valued or valued at less than the bank's note? It sounds to me like you're perhaps pulling on the wrong rope. If your concern is encouraging occupancy, go directly to policies that encourage occupancy rather than concluding that this is banking problem at its root. Maybe it is; maybe it isn't, but rather than trying to puppeteer an outcome by tweaking something in banking, there might be more direct policy frameworks that would help more.
  - User23 5y ago
    This is circular reasoning. These multi-year vacancies exist precisely because the present regime encourages it. One determines the appropriate vacancy rate and then tunes the regulatory framework to remove barriers to achieving that public purpose. The most direct policy framework would be wielding the sledgehammer that is eminent domain. However, I think government should use the lightest touch possible to achieve the public purpose, so I’d prefer setting the rules in a way that maximizes freedom while still achieving the public purpose of having non-blighted commercial districts.
    - sokoloff 5y ago
      It’s not just banking ratios that cause this behavior, though, but rather in part the owners of commercial property, often let out for 5 year terms with 2 5-year renewal options, who don’t want to be too quick to lower their rental base for possibly 15 years for a 1-2 year recession. Property with no bank note on it would behave the same way. (It’s just exceedingly rare, especially in an easy-borrowing, money-printing presses running environment.