Real Estate Prices Pose a Problem for S&Ls;, Seidman Says
Weak real estate markets will cripple many already troubled savings and loans, including some in California, forcing them into government hands and driving up the cost of the massive S&L; bailout, the chief of the federal thrift cleanup effort said Thursday.
Real estate prices in the San Francisco area have “topped out now, by every indication,” said L. William Seidman. Government will be taking control of “a number of S&Ls; in the San Francisco area,” he predicted, without naming any individual institutions.
Federal regulators have seized 400 failing S&Ls; and could acquire several hundred more, depending on the health of real estate markets, Seidman said in a breakfast meeting with Times reporters and editors.
“It’s a moving target all the time which is tied into the marketplace,” said the chairman of the Resolution Trust Corp., which administers the takeover of S&Ls; and the sale of assets from defunct institutions. Taxpayers will bear the burden as the government closes insolvent S&Ls; and pays off depositors, whose accounts are insured up to $100,000.
S&Ls; are big construction and real estate lenders. When sales of homes and rentals of office buildings lag, borrowers default on loans, and thrift institutions suffer financial difficulty.
The real estate depression in Texas and Oklahoma, under way for years, has spread to Arizona, and the Northeast is showing severe signs of weakness, Seidman said. “There is not a developer from here to Maine who doesn’t have a problem on one of his projects,” he said. “They’re all under stress.”
Seidman avoided making any flat predictions of widespread economic trouble for California. But he noted that people in Arizona and Massachusetts were saying several years ago that their economies were too diversified to suffer a Texas-type plunge in real estate values.
“The California economy has been very strong; real estate markets are very strong,” Seidman said. However, he said, in some areas of the state, there are “high new construction levels, relatively low employment gains, and high new vacancy rate gains.” This means the supply of office space is apparently outpacing the economic activity needed to fill those new buildings.
Seidman came under criticism recently after issuing a list of real estate market indicators showing that some California markets, including Orange County, had the highest office vacancy rates outside the depressed markets of Texas, Oklahoma, Arizona and Colorado.
He said the list “doesn’t predict the future, it simply says these are the kinds of indicators that people ought to know in dealing with the area.” But this oblique warning from a federal regulator has been upsetting for local business executives.
At a meeting with the Los Angeles Chamber of Commerce, “they said it can’t happen here and (told me), ‘You’re going to make things worse,’ ” the RTC chairman recalled.
But, he said, he told the local officials “all we’re doing is putting numbers out.” One of the statistics was a 20.8% office vacancy rate in Orange County. Asked about that market, Seidman quipped, “I don’t know whether it’s something in the water.”
Seidman will be leaving his post under pressure from White House and Treasury officials, who were irritated by his outspoken independence, including his sometimes pessimistic discussions of the depth of the S&L; crisis. Seidman’s term does not expire until 1991, but he has indicated that he will leave sometime after June 30, the scheduled date for the closing or sale of 140 insolvent S&Ls.;
He was characteristically blunt in talking about the financial collapse of huge portions of the S&L; industry.
“This is a financial disaster that is beyond the imagination of most people, and it’s been created. It’s there. Now it’s just a question of what’s the most efficient way to try to get out of it.”
Despite weakening real estate markets, federal regulators are pressing forward with an ambitious plan to sell billions of dollars in real estate from seized S&Ls.;
“The government is a very poor holder of property in terms of enhancing its value,” Seidman said. The best strategy is to unload the property “at the true market,” he added. On Tuesday, he approved a policy of cutting prices 20% on properties unsold after nine months.