The troubled Resolution Trust Corp., now under scrutiny for questionable contracting practices, has left an important legacy that is helping banks and insurance companies dig out of their real estate problems.
The agency accelerated the development of a nearly $17-billion market for trading of bonds backed by commercial and multifamily property loans. That market has evolved into an important underlying factor in the improvement of bank earnings, analysts said Wednesday.
Beginning next week, the nation's major banks will begin reporting third-quarter earnings, which are expected to show a continued improvement in the troubled real estate assets on their books.
David Berry, research director at Keefe, Bruyette & Woods in New York, said that of 133 banks his firm recently analyzed, 70% are expected to see a decline in all troubled loans and foreclosed real estate, while 3% may see an increase.
"The real event is new problems have stopped showing up," he said.
That's quite a contrast from 1990, when falling property prices and lack of investment led to a high rate of delinquency in commercial real estate loans. Bank earnings suffered as lenders set aside millions to cover anticipated losses.
Berry attributed part of the expected improvement in banks' balance sheets to greater cash flow and number of investors in the commercial real estate market.
Before the RTC was created by Congress in 1989 to sell the assets of failed savings and loans, some Wall Street investment banks and major real estate investors took a stab at selling commercial real estate loans as securities.
"There were deals done like this before, but the market was nothing," said Andrew Albert, editor of Liquidation Alert, a Newark, N.J., industry newsletter.
The market tripled in size to $4.5 billion in 1991 when the RTC began selling its bonds, according to a study released Tuesday by Kenneth Leventhal & Co., a national accounting firm. It tripled again in 1992 to nearly $17 billion, with the RTC accounting for 55% of the market, the study said.
The sheer size of the RTC sales helped establish a floor on prices and attracted wide investor interest. That led the major rating agencies to research and rate the bonds, making the market more predictable.
The process on Wall Street is known as "securitization," in which loans are packaged and sold as bonds. The Federal National Mortgage Assn., or Fannie Mae, sells billions worth of mortgage-backed bonds to investors, using the proceeds to make mortgage credit more widely available.