Foreclosures and Fifth Third Bank and Banks and Indiana Banks and Mortgages

Foreclosed properties create quandary for financial institutions

February 2, 2009

The unfinished eight-story luxury condo building at 707 E. North St. is on track to get a reluctant new owner: Cincinnati-based Fifth Third Bancorp.

The stalled Beilouny Luxury Properties development near Massachusetts Avenue could join dozens of properties—from undeveloped residential lots to half-vacant office buildings—to land on the books of banks during one of the worst markets ever for real estate. The lack of buyers is leaving banks with a dilemma: Accept a fire-sale price today, or mothball properties in hopes values eventually return.

Real estate holdings of the nonbank-branch variety are growing fast on bank balance sheets. Fifth Third, which operates in a dozen states, saw its so-called other real estate owned, or OREO, rise from $100 million at the end of 2006 to $230 million at the end of 2008. Cleveland-based KeyCorp, which is in 14 states, saw its figure jump from $55 million to $149 million.

In some cases, banks are reporting higher holdings because they're taking back properties quicker than they can find buyers. Other banks may be holding out for better prices; federal rules allow banks to hold real estate not connected to banking for up to five years.

"If you try to sell right now, you get pennies," said Henry Efroymson, an Ice Miller attorney who specializes in loan workouts, credit disputes and bankruptcy. "Lenders may feel like it's throwing good money after bad in this market.

"The conventional wisdom held by lenders is, the best you can do is hold onto properties, not invest in them, and hope the properties can be turned down the road when the market recovers."

Still, most banks prefer to unload properties they take back as quickly as possible to avoid extensive maintenance and upkeep costs, said Mike Renninger, principal of Carmel-based bank consultancy Renninger & Associates LLC.

Properties become part of a bank's "other real estate owned" after they write down the difference between the loan value and the current market value of the real estate.

"The numbers are growing not because banks still have the same properties, but because more are coming in than coming out," Renninger said.

A Fifth Third spokeswoman refused to discuss the bank's lending relationship with Beilouny Luxury Properties, which also developed the 757 Mass Ave condo building. The bank is foreclosing on four unsold units in the 757 property, along with common areas and commercial space, to recover on an outstanding loan balance of $3.5 million.

The bank yanked its funding for the 707 property late last year as the building neared completion. It had not begun foreclosure proceedings by late January, opting instead to release limited funds to fully enclose the building, protecting it from a more rapid decline in value, said Chuck Mandrell, president of locally based Enterprise Electrical & Mechanical Co., which also is suing Beilouny.

"It was a point of diminishing returns for them," Mandrell said of Fifth Third.

Many banks are feeling similar pain, regulatory filings show. In Indiana, Muncie-based First Merchants saw its "other real estate" holdings jump from $2.1 million in 2006 to $16.9 million in 2008; German American went from $845,000 to $3.8 million; and Ameriana Bancorp went from $610,000 to $4 million.

Indiana Business Bancorp recently reported a quarterly loss it blamed on a $627,000 write-down of two properties, a retail building and a multifamily development it didn't identify. The Indianapolis-based bank is carrying the properties on its books as $1.2 million in "other real estate owned."

"Events like this are to be expected during these difficult economic times," bank President James S. Young said in a press release. "We will work hard and smart to upgrade and market these properties as well as pursue our legal avenues in an effort to recover as much of our loss as possible."

One of Efroymson's clients, locally based Salin Bank, now owns dozens of residential lots it took back from the defunct builder Davis Homes, speculative assets viewed by investors these days as "toxic."

Reluctance on the part of banks to extend new credit or renegotiate terms—despite massive cash infusions from the Troubled Asset Relief Program, the federal government's bailout initiative—means more properties could share a similar fate.

"All of us were hoping TARP would result in more long-term workouts with credit issues," Efroymson said. "I'm not seeing banks or other lenders freeing up credit at all. In fact, it's the opposite. Many lenders are stiffening loan requirements even further."

While most banks have added real estate to their books, the figure at Evansville-based Old National has fallen from $3.3 million at the end of 2006 to $2.9 million at the end of 2008.

The bank is sitting on residential lots, but the company's move two years ago to pull back on commercial lending proved prescient. Demand has since cratered for pretty much every type of real estate development.

"I think everybody is a little shell shocked right now with the rapid downturn in the economy," said Bob Jones, the bank's CEO.

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