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Bank Problem Real Estate Owned Remains Stubbornly High

By Nathan Stovall and Salman Aleem Khan
SNL Financial

Real estate owned, or OREO, on bank balance sheets has fallen 9.7% from a year earlier and is nearly back to the levels witnessed in 2009

(Note: edited due to length)

SNL data shows that OREO held at commercial banks and savings banks totaled $38.51 billion at the end of the fourth quarter 2012, down from $42.62 billion a year earlier and $47.96 billion at the end of the fourth quarter of 2010.

Regulators are encouraging banks to work through their problem assets and move them off their books, but few banks simply have enough capital to withstand the hit they will take when selling foreclosed real estate in bulk, said Bryan Cave LLP Partner Walt Moeling. The Atlanta-based attorney said that five years ago some banks might have thought that the value of problem credits would increase if they held onto the assets long enough but that institutions are now more realistic about their actual worth.

"I don't know of anyone that has capital capacity to do so that is not trying to offload foreclosed assets and bad loans," Moeling told SNL. "I don't see anyone really wanting to hold them. Everybody would love to get rid of them. It's just an anchor."

Despite that desire, the pace of distressed asset sales remained relatively slow through the first nine months of 2012, tracking virtually in line with the pace of sales activity in 2011, when sales fell to $19.37 billion from $29.61 billion in 2010, according to SNL

As Moeling noted, sales activity has not picked up because many banks lack the capital necessary to absorb the hit they would take when selling properties on their balance sheets. Market participants have long said that banks are forced to take the deepest haircuts when selling construction and land-development-related assets. And not surprisingly, construction and land development assets represent the largest portion of OREO on bank balance sheets at $12.04 billion, or 31.26% of all OREO, according to SNL data.

The second-biggest portion of OREO falls into in the commercial real estate category - domestic office loans secured by nonfarm, nonresidential real estate - which totaled $8.90 billion, or 23.1% of all OREO at the end of the fourth quarter of 2012, according to SNL data. The next biggest portion of OREO comes from one- to four-family properties, totaling $8.33 billion, or 21.64% of all OREO on bank balance sheets.

A far greater number of one- to four-family loans are locked up in the foreclosure process. The amount of one- to four-family loans in foreclosure - one- to four-family loans in default but not yet seized by banks - dwarfs the size of one- to four-family properties held in OREO on bank balance sheets, totaling $91.51 billion at the end of the fourth quarter of 2012. Even the aggregate amount of the top 20 banks reporting the largest number of mortgages headed for foreclosure stands out against the level of one- to four-family properties held in OREO. SNL data shows that those institutions in aggregate reported $80.92 billion in mortgages in the process of foreclosure, or nearly 10x the amount of one- to four-family properties in OREO for the entire banking industry.

Two of the top five banks in terms of OREO concentrations on their balance sheets - NBH Bank NA and Capital Bank NA - have acquired numerous failed banks and distressed institutions. And Beal Bank USA, which reported the third-largest concentration of OREO to assets, at 2.08% at the end of the fourth quarter of 2012, works to acquire distressed credits as part of its regular business strategy.

Some of the other largest relative holders of OREO operate in markets that were badly hit by the credit crisis. For instance, Troy, Mich.-based Flagstar Bancorp Inc. tops the list with OREO accounting for 4.96% of its asset base, and five Puerto Rico-based banks also made the list of the top 20 banks by OREO to assets.

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