OCC potential directive has implications on marking down values of commercial loans.

By John Richard, Managing Director, Investcap Advisors LLC

In an announcement that came as a surprise to many CMBS market participants, the Office of the Comptroller of the Currency (OCC) is considering a move that would require banks to mark down the value of some of their commercial real estate loans. This announcement has two broad implications. First, the OCC would only consider such a move for certain institutions that are healthy enough to weather a decline in asset value. This points to the very favorable effects low interest rates are having on the earnings potential of banking institutions. One so called financial health measure, NIM (Net Interest Margin), has improved recently for some institutions. Low rates allow banks to pay low interest on deposits at a time when these same institutions are finding attractive lending opportunities with appropriate risk premiums. The second broad implication associated with this potential OCC directive concerns the all-important process of price discovery. Market recovery in the commercial real estate market will be difficult to pinpoint if a bottom cannot be felt. It is difficult to feel this bottom without transactions occurring. The OCC directive will force the hand of banks to write down the value of loans that have not generated a mortgage payment for the last three months or more. Performing loans may also be written down. Hypothetically, this process could create a market of interested loan sellers (the banks) previously reluctant to sell in a down market which hopefully would lead to the entrance of private investor capital back into the market. The implications for CMBS, generally speaking, are less certain but pricing clarity in the whole loan market could certainly be construed as a positive for Servicers and Borrowers alike in the midst of workout situations.